Especially German bonds rallied yesterday and curves bull-flattened. The moves were smaller in US yields, where short yields actually edged higher (while longer yields fell). Intra-Euro-zone spreads widened.
Equities were under pressure, especially in Europe, where the losses were around 1%. In the US, S&P 500 retreated by 0.49%. Asian equities are trading mixed to lower this morning, but the moves have been rather limited.
Yesterday’s market action reinforces the view that the near-term upside in yields looks limited, but it is still on the equity side, where more notable profit taking could take place.
In such a scenario, bonds should rally further. Bonds are likely to remain supported today, and yields could fall a bit further.
French PMIs surge – more than volatility?
The flash March Euro-zone composite output PMI fell only marginally, from 53.3 to 53.2, a pleasant surprise. The numbers point to continued recovery in the Euro zone.
However, the headline numbers were boosted by a surprising jump in the French composite PMI, from 47.9 to a 31-month high of 51.6, which looks suspicious. The French PMI has exhibited some volatility from month to month, so one should not take the numbers at face value. Compared to the INSEE manufacturing confidence indicator (released today at 8:45 CET), the manufacturing PMI is now pointing to better development, while it was at a weaker level still some months ago. Still, the French PMI numbers have for some time been pointing to weaker development compared to the hard data. German PMIs, in turn, fell.
In the US, the Markit flash March manufacturing PMI retreated from 57.1 to 55.5, but the decline came after a surge from 53.7 in January, and the Markit measure remains at clearly higher level compared to the manufacturing ISM index.
Brazil feeling more heat, illustrating broader emerging market uncertainties
The rating agency Standard & Poor’s downgraded its rating on Brazil from BBB to BBB-, the lowest investment grade rating. The agency cited fiscal slippage, the prospect of fiscal execution remaining weak amid subdued growth, the constrained ability to adjust policy ahead of the October presidential elections and some weakening in Brazil’s external accounts. Yesterday’s news was no doubt a blow, but a downgrade to junk would really hurt, and this does not look likely at least for now. S&P awarded the new rating a stable outlook, while both Moody’s and Fitch have a stable outlook on their Baa2/BBB ratings.
Yesterday’s downgrade was another illustration that virtually all the bigger emerging markets are struggling with problems and uncertainties at the moment, not only China and Russia. Weak developments in emerging markets clearly remain a risk factor for the global economy and risk appetite more generally.
Eyes on the German Ifo and US house price data
Euro-zone confidence data releases will continue today in the form of the German Ifo index at 10:00 CET. After yesterday’s fall in the PMIs, risks are to the downside, though a fall in confidence should not be a big surprise at this point. After the surprising jump in the French PMIs, also the INSEE manufacturing confidence indicator at 8:45 CET will gather more interest than usually. In the UK, February CPI will be out at 10:30 CET.
In the US, January S&P / Case-Shiller house price index will be released at 14:00 CET, and March consumer confidence by Conference Board, February new home sales as well as the Richmond Fed manufacturing index at 15:00 CET.
In central bank speeches, the ECB Draghi will star at 17:00 CET, Weidmann at 17:30 CET, the Fed’s Lockhart at 21:00 CET and Plosser at midnight.
New 10-year Dutch benchmark out today
The Netherlands will sell a new 10-year benchmark today for a minimum of EUR 5bn via the Dutch Direct Auction. Initial spread guidance for the 2% 15 July 2024 bond was put at 37 to 40bp over the German DBR 1.75% February 2024. The allocation will be released after the closing of the book, mostly likely late in the afternoon. Italy, in turn, will sell December 2014 zero-coupon bonds EUR 2 to 2.5bn.
In the US, this week’s benchmark auctions will be set in motion by the USD 32bn 2-year offering.
Nordea