Growing unrest in China Setting the Stage for a Risk-off Start

US and European bond markets showed a divergent picture as US markets reopened after the Thanksgiving Holiday. US Treasuries continued to outperform. A disappointing US PMI released earlier last week only reinforced the view that there is a strong enough case for the Fed to slow the pace interest rate hikes to a 50 bps step at the December meeting. US yields in the 2-10-y sector eased 1-2 bps with the 30-y gaining marginally. The US 10-y closed the week at the 3.67% support. The picture in Europe was different. German yields jumped 8.3 bp to 12.4 bps. There was not one unequivocal driver. ECB comments suggested that the debate on a 50 bps or 75 bps next step isn’t really decided yet. Recent EMU eco data also were slightly better/less worse that expected. The German 10-y yield closed exactly at 1.97%, returning the neckline that was broken earlier last week. Equities in the US and Europe both closed little changed. The dollar also showed no clear trend. EUR/USD finished the week at DXY 105.96, with recent correction lows still nearby. Similar story for the EUR/GBP cross rate.

The growing unrest related the new covid restrictions in China is setting the stage for a risk-off start to the new trading week as investors ponder the impact on demand. Early indications on Black Friday spending in the US also show a mixed picture. Asian equities mostly trade in negative territory with Chinese indices underperforming. US Treasuries remain well bid with yields declining bps currently. Despite the risk-off, USD gains remain modest.

China/commodity related currencies underperform as does the yuan, breaking above the 7.17 ST. Uncertainty on global/Chinese demand is pushing Bent oil to the lowest level since January.

The eco calendar in the US and Europe is thin. We keep an eye at speeches of ECB Lagarde, Fed Williams and Fed’s Bullard as the countdown the December ECB & Fed meetings has started. Core bond yields this morning feel some downward pressure due to the China related risk-off. The upcoming data EMU CPI Wednesday, US consumer confidence , US manufacturing . ISM and PCE Wednesday, US consumer confidence, US manufacturing. ISM and PCE deflator and the US payrolls on Friday probably are more important to shape markets view on the pace of Fed and ECB rate hikes. Breaking below 3.67%, the US 10-y yield finds next support at 3.55%. The 10-y Bund stays below the 2.0% barrier. The USD performance this morning is far from impressive. Even so, it’s probably too early for EUR.USD to return to recent peak levels.

Australian retail sales disappointed in October, dropping 0.2% M/M vs a 0.5% monthly gain expected. Weakness was broad-based across industries with food retailing being the positive outlier. Higher interest rates and faster inflation are effecting Australian households. Part of tourism spending is also back done offshore as borders reopened.