Global core bonds are treading water today as the sluggish US-Sino trade negotiations put investors in wait-and-see modus. Global core bonds started the week with a cautious downward trend, unable to profit from a lower equity opening in across Europe. As equity markets continued to slide, core bonds regained some ground. The Bundesbank said that Germany’s rebound at the start of the year was largely due to one-off factors and added that the underlying trend remains weak. German Bunds jumped higher and undid part of its intraday losses. The German yield curve is steepening with yield changes vary between -0.2 bps (2-yr) and +0.7 bps (30-yr). US Treasuries behaved similarly and erased early losses throughout the day. The US April Chicago National Activity printed below expectations but had little impact, as was the case for comments by Atlanta Fed chief Bostic. The rather dovish policy maker doesn’t foresee a Fed rate cut this year. The US yield curve is mixed with modest changes in the range of -1.5 bps(30-yr) to +0.1 bp (2-yr). Italian Deputy PM Salvini repeated that tax cuts should be initially financed with higher deficits and vowed to change EU Tax rules to push through his promise of a 15% flat tax for everyone. The Italian spread over the German 10-year yield widened (+ 3 bps). Other peripheral spreads remain stable.

The escalation in the US China trade war is causing substantial losses on most equity markets. Investors fear more retaliation after US companies suspended (some of) their supply to Chinese tech giant Huawei. However, for now, the risk-off repositioning mainly concerns equites. Moves in core bonds and in the major FX cross rates are modest. The yen outperforms, but its gain is modest and orderly. USD/JPY returned below the 110 handle and trades currently in the 109.80 area. Last week’s USD rebound against the euro also halted. US/German interest rate differentials are showing no clear directional trend. EUR/USD is regaining a few ticks and trades in the 1.1165 area. The relative calm on the FX markets is at least a bit remarkable. Markets apparently are pondering where the damage of a further escalation in the trade war might be the worst. The Swiss franc is gaining a few ticks (EUR/CHF dropped again below 1.13). The Norwegian and Swedish krona are again in the defensive. Central European currencies (CZK, Forint and zloty) for now are little affected.

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Recent Brexit-driven decline of sterling slowed, at least temporary. Political uncertainty on the fate of the Brexit deal and on the replacement of Theresa May remains as high as it has ever been. Still, sterling investors are awaiting next steps in the process. Sterling is holding near recent lows against the euro and the dollar; EUR/GBP is trading in the 0.8760 area. Cable rebounded temporary on USD weakens intraday, but is again trading in the 1.2730 area.

News Headlines

Belgian consumer confidence rose from -7 to -5 in May, the strongest outcome since December 2018. Details are showing an increase in the outlook for the Belgian economy (-9 from -13), a decline in concerns about unemployment (7 from 12), expectations of personal financial situation (-2 from -1) and expectations of saving capacity (-4 from -1).

The German Bundesbank fears that events supporting growth after the turn of the year will lapse or even reverse. Those factors include fiscal measures that boosted private consumption, a revival in car sales and mild winter weather. Downturn forces continue to be prevalent in industry and may even intensify somewhat. A gradual rebound in activity is only expected in H2 2019 alongside a global recovery.


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