Modest Risk-off after latest North-Korean escalation

Second failed test of 2.1% despite weak payrolls

Core bonds lost moderate ground on Friday despite a weak US payrolls report. US Treasuries underperformed German bonds and both curves bear steepened. In a daily perspective, US yields rose by 1.6 to 5.1 bps, while German yields rose by 0.2 to 4.3 bps. The US move was technically significant with a second failed test of US 10-yr yield support (2.1%). The T-Note future showed a bearish engulfing pattern on the charts.

Comments of ECB Nowotny that one shouldn't dramatize the recent euro strength pushed the Bund temporary lower, but rumours that the ECB would delay its decision on the APP outlook maybe till December (a Bund positive) were ignored. A strong US ISM manufacturing business confidence pushed both US Treasuries and Bunds lower. So, the market was selective in its reaction on various impetus. The immediate reversal of the gains on the US payrolls when the 2.10% 10-yr US yield support was tested, suggests that the upside for core bonds may be exhausted for now. The weak August payrolls might have been considered a statistical quirk, given other labour market evidence. However, safe haven US Treasuries eased further going into a long weekend, which is also a bit unusual. In the same vein, the dollar reversed its initial post-payrolls losses

US markets closed for Labour Day

US markets are closed today and the EMU calendar is uneventful with only the Sentix investor confidence for September and the PPI for July. Later this week, most attention goes to Thursday's ECB meeting, the return of US Congress (Tuesday) from its August recess and many Fed speeches ahead of the black period. The rumour mill about the ECB meeting is running hot. ECB Nowotny downplayed euro strength, but unnamed ECB sources suggested that euro strength is making the ECB Council nervous. Other sources said that a decision on the APP programme will be delayed to October or even to December. The ECB president sees as of yet no rise in underlying inflation and a stronger euro isn't going to help inflation higher. On the other hand, growth is strong and above trend, which implies that underlying inflation will at some point start rising. This puts the ECB in a difficult position. The US House will have to hurry up (12 working days left) with the vote on a continuing spending bill to avert a government shutdown early October and on the debt ceiling. Regarding US data, we expect the Non-manufacturing ISM to be strong (as was the manufacturing one, released last Friday).

EMU bond supply heats up after Summer lull

This week's scheduled EMU bond supply comes from Austria, Germany, Spain and France. The Austrian debt agency kicks off tomorrow with tapping the on the run 10-yr RAGB (0.5% Apr2027) and an off the run RAGB (4.5% Mar2037) for a combined €1.2B. The German Finanzagentur taps the on the run 5-yr Bobl (0% Oct2022) on Wednesday. The French Treasury holds an OAT-auction on Thursday with two on the run OAT's (1% May2027 & 1.25% May2036) and two off the run OAT's (4.5% Apr2041 & 4% Apr2060) on offer for a combined €8-9B. The Spanish Tesoro sells three on the run bonds that same day: 5-yr Bono 0.4% Apr2022, 10-yr Obligacion 1.45% Oct2027 & 15-yr Obligacion 2.35% Jul2033. The amount on offer still needs to be announced.

Modest Risk-off after latest North-Korean escalation

Risk aversion reigns overnight in Asian dealings though the market impact remains rather modest. The latest escalation on the Korean peninsula (nuclear test & aggressive verbal response from the US) caused market moves. The US Note future and the Japanese yen gain ground while stock markets lose up to 1% (China outperforms). We expect a stronger opening for the Bund.

The eco calendar is uneventful and US markets are closed for Labour Day Holiday. The timestamp of the market reaction to geopolitical events was rather short of late, but today's special circumstances (low volumes, no other trading items) suggest that risk aversion could remain at play during European dealings. We don't expect technically relevant moves though as many investors will probably remain side-lined with this week's interesting calendar in the back of their minds (Fed speeches, ECB meeting,... see above). Market expectations about an ECB announcement on APP (extension, but lower volume) have eased during Summer.

The US Note future tested the contract high in combination of a test of 2.1% support in the 10y yield twice last week. A break didn't occur. A bearish engulfing pattern (trend reversal) appeared on the chart, but confirmation is needed. It could mark the start of a correction higher/consolidation with more neutral positioning going into key central bank meetings (ECB on Thursday, Fed on Sept 20).

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