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Wednesday, 06 June 2018 P. 1 Markets • Global core bonds closed higher yesterday. German Bunds outperformed US Treasuries. German yields dropped by 2.2 bps (30-yr) to 4.9 bps (10-yr). The US curve bull steepened with yields 2.4 bps (2-yr) to 0.1 bp (30-yr) lower. Strong US eco data (non-manufacturing ISM, JOLTS) were unable to offset core bond gains stemming from new stress on the Italian BTP market and a volatile oil price. The Italian 10-yr yield spread vs Germany widened by 30 bps after Italian PM Conte’s maiden speech in parliament stressed willingness to execute the Lega-5SM coalition agreement without a doubt. Brent crude initially lost more than $1.5/barrel before rebounding into the US close. Core bonds topped off in European after trade on rumours that the next week’s ECB meeting is a “live” one. ECB President Draghi will probably refrain from announcing changes to the ECB’s policy, but might commit to doing so in June. The rumours stopped yesterday’s remarkably slow decline in EUR/USD, pushing the pair back above 1.17. They had a similar effect on EUR/GBP which faced bigger selling pressure after a stronger than expected UK services PMI. The pair closed the session at 0.8751, coming from 0.8789. • Risk sentiment is positive overnight. Most Asian stock markets gain ground, outperforming a mixed WS (bar Nasdaq). The US Note future slides lower while USD/JPY continues this month’s early rebound, testing the 110 mark. The Bund will probably open lower, taking into account the ECB gossip. Today’s eco calendar only contains second tier eco data, suggesting sentiment-driven trading. Core bonds have more downside potential going into the Fed and ECB with the US central bank potentially hinting at an acceleration of its tightening cycle and the ECB possibly preannouncing a policy change in July. From a technical point of view, we expect the US 10-yr yield to move towards 3% going into the Fed meeting, while first resistance for the German 10-yr yield kicks in at 0.5%. More stress in the BTP market is a wildcard. We advised against buying into any short term relief rally. Yesterday’s action strengthens our belief. A normalization of credit premiums was long overdue in a stretched EMU government bond market. Today’s story is less straightforward for FX markets. ECB rumours might be sufficient to keep EUR/USD more or less in balance the next days. More specifically, we eye a 1.1540-1.1830 trading range. Sterling remains locked in the tight 0.87-0.88 range. • The Aussie dollar sets a new short term high this morning after stronger than expected Q1 GDP data (1% Q/Q & 3.1% Y/Y). Q4 2017 GDP growth was upwardly revised from 0.4% to 0.5%. AUD/USD rises above 0.7650. News Headlines • Jens Weidmann, head of Germany’s central bank and possible successor of Draghi, has expressed his doubts on Macron’s proposal for reforming the currency bloc, stating that the Eurozone could create dubious incentives if it introduced a greater degree of fiscal risk sharing. His comments underline German skepticism on the proposal. • In the US, the job openings rose, for the first time since this record-keeping started in 2000, above the unemployment. The historically tight labor market and stronger inflation is forcing the Fed to watch closely. If more signals appear of an overheating market, they might need to raise interest rates more aggressively than previously stated. • After statements that President Trump is considering negotiating with Canada and Mexico separately, Treasury Secretary Mnuchin urged the President to exempt Canada from steep steel and aluminum tariffs at a White House trade meeting on Tuesday. Not all advisors were in agreement, leaving Trump yet to be undecided. KBC Sunrise Market Commentary
