HomeContributorsFundamental AnalysisYesterday, Core Bonds Continued Trading With A Positive Bias

Yesterday, Core Bonds Continued Trading With A Positive Bias

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Yesterday, core bonds continued trading with a positive bias. Several (geo)political issues were pending. European bond investors still pondered the potential impact of mediocre eco data for ECB policy going forward. The safe haven bid for bonds intensified as US president Trump cancelled the meeting with North Korea’s Kim Jung Un. However, the risk-off reaction was modest and petered out later in US dealings. US yields declined between 1.1bp (5y) and 2.7 bps (30-y). Bunds outperformed (yields declining between -1.6 bps (2-y) and -4.8 bps for 30-y). On the Intra-EMU markets, Italian spreads couldn’t maintain an initial narrowing (10-y + 3bps). Most other peripheral markets succeeded a modest tightening (-2 bpsfor Spain and Portugal, -7 bps for Greece). Investors took a wait-and-see approach on Italy, awaiting the composition of the new government. This morning, Asian markets are reacting calmly to the cancelation of the US-North Korea meeting. Regional equities mostly shows modest losses. US equity futures are rebounding and US yields are rising slightly. Later today, IFO German business confidence will be published. In the US, the durable goods orders and the final U of Michigan consumer confidence will be published. The German IFO release takes centre stage. A stabilisation is expected (98.5 vs 98.7 for the expectations). Of late several EMU data pointed to a substantial cooling of the EMU growth momentum. Will the Ifo confirm this trend? After the decline in German/EMU yields, quite some bad news should already be discounted. Even so, the Bund contracts (160 area) and the German 10-y yield is closing in on key technical levels (0.47%/0.5%). We maintain the working assumption that these levels shouldn’t be re-broken if the European economy remains on an acceptable growth path and if the prospect for ECB normalisation later this year and next year remains in place. However, given recent eco developments and given the uncertainty on Italy, we keep a close eye how the test evolves. Aside from the data, several ECB and Fed members will speak.

Yesterday, the dollar traded with a slightly negative bias. EUR/USD tried a rebound off the 1.17 area but the move had no strong legs. USD/JPY drifted back south to test the 109 area, but rebounded later in line with equities. A very poor German Ifo release would probably be a negative for the euro. However, as is the case for EMU/German yields, we have the impression that quite some euro negative news should already be discounted. That said, if sentiment on risk (US equities) holds up relatively well and the decline in US yields would halt, this is maybe still some room for further USD gains short-term, both against the euro and the yen.

Yesterday, UK April retail sales were stronger than expected. The provided a temporary support for sterling. However, day didn’t change overall investor expectations on the path for future BoE rate hikes. EUR/GBP closed the session little changed in the 0.8760 area. Headlines from the EU-UK Brexit negotiations suggest that little progress has been made. Today, the details of the UK Q1 GDP will be published. The composition of GDP is interesting info on the status of the UK economy, but we don’t expected it to have a meaningful impact on sterling trading. More consolidation of EUR/GBP in the 0.87 big figure might be on the cards.

News Headlines

Yesterday US President Donald Trump cancelled a summit with North Korea’s Kim Jong Un. Trump said it would be ‘inappropriate’ after the ‘tremendous anger’ displayed by Pyongyang but held out the prospect of a new meeting. North Korea replied it is still willing to meet Trump and that it is open to ‘resolving problems at any time in any way’.

BoE’s Carney issued a warning on the dangers of a ‘disruptive Brexit’, saying they would be forced back into some of the same measures they pursued in the aftermath of the Brexit referendum if the ‘transition isn’t smooth’.

US Commerce Secretary Wilbur Ross will visit China early next month for another round of talks amid ongoing trade frictions between the world’s two largest economies. (Reuters)

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