KBC Market Research Desk
KBC Bank
Global core bonds were mixed yesterday with US Treasuries heavily outperforming German Bunds. US equity markets continued to sell-off, pushing major indices to a multi-month low. Global growth fears remain at play, with the US and China still in trade discussions and oil prices slumping. Ahead of the Fed meeting of tomorrow, investors worry a widely expected new rate hike will give the US economy further headwind. Focus will be on the Fed ‘dot plot' to see how many rate hikes the central bank projects next year. The NAHB Housing Market index unexpectedly decreased this month to 56, down from 60 the month before and confirming the US housing market is cooling down. All this combined pushed investors in the direction of safe havens. US Treasuries rallied higher with the US yield curve bull steepening. Changes ranged from -3.1 bps (30-yr) to -4.0 bps (2-yr). This suggests that investor take even take into account a scenario where this week's Fed rate hike is the final one of the tightening cycle! European markets were able to limit losses, with changes on the German curve varying between -0.5 bps (30-yr) and + 1 bp (5-yr).
Asian equity markets are tracking losses on WS, with Japanese indices underperforming. Chinese equities briefly profited from a new tax-cut plan, but continued to slide after president Xi Jinping failed to meet investor expectations by offering no new commitments to open or stimulate China's economy at a high-level speech. China has also cut its US Treasuries' holdings for a fifth straight month in October, matching mid 2017 levels. Given the current sentiment, we expect a similar (weak) opening for European equity markets. US Treasuries and German Bunds are in positive territory this morning.
Today's eco calendar is paper thin. In the US, more housing data will be published. Both Housing Starts and Building Permits are expected to remain stable. Risks are for a further deterioration which would add evidence to the slowdown of the US housing market. German IFO business sentiment for December is released as well.. Consensus expects a little decrease to for the forward looking expectations index to 98.3, down from 98.7 in November. Given the disappointing PMI's of last Friday, we see risks rather tilted to the downside. US/German eco data will thus unlikely shift risk sentiment for the better today.
From a technical point of view, the German 10-yr yield tested the previous 0.28% support level last week, but a rebreak didn't occur. The US 10-yr yield heads again to the 2.78/2.8% support level ahead of tomorrow's Fed meeting.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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