The ECB delivered its easing package yesterday (see more below), and the initial market reaction was higher long yields, a steeper curve, a rally in peripheral bonds and a weaker euro. However, the market reaction turned later, and the 5-year part of the curve led yields lower. The German 5-year yield ended up plunging by 6bp, while the 10-year yield fell by 3bp. Peripheral bonds still ended the day with gains, albeit reduced ones compared to earlier in the day, and e.g. the Italian 10-year spread vs Germany narrowed by some 6bp. US yields closed the day lower by 1-2bp.
Yesterday’s market reaction suggests even a slight rise in longer yields is enough to attract new buyers to the market. Still, yields remain low and another positive payrolls report from the US today certainly has the potential to deliver losses for bonds.
EUR/USD fell to close to 1.35 at one point, but rebounded later to above 1.365, not really a thumbs up signal for the ECB.
Equity markets ended the day with gains on both sides of the Atlantic. S&P 500 advanced another 0.65%. Asian markets are trading mixed this morning, but Europe is set to open higher.
ECB’s package deal with plenty to offer
The ECB delivered a whole package of measures yesterday, including rate cuts, 4-year targeted longer-term refinancing operations (with conditions relating to lending to the private sector), discontinuing SMP sterilizations, further preparatory work for a purchase programme of asset-backed securities, and prolonged full allotment regime in main refinancing operations.
However, the ECB also signalled that benchmark rates had now hit bottom, but on the other hand the fixed-rate in the new refinancing operation can be taken as a signal the ECB does not expect to start raising rates in years. In addition, as it will take a long time to see the effect of the measures announced today, the ECB will be very reluctant to jump into any QE programme any time soon. An ABS programme will likely be added to the stimulus package later. Draghi himself said that the ECB was not finished.
Even though the ECB’s measures fell clearly short of an aggressive asset purchases programme, there were a lot of positive elements involved, which will support the recovery. The package should further support a rally in peripheral bonds, and leave the door open for a correction higher in long yields.
Further sanctions on Russia still in the air
The leaders of the G7 countries warned Russia of further economic sanctions ahead. They said further sanctions could follow in a month, unless Russia recognized the legitimacy of the new Ukrainian President, prevented the flow of arms across the Ukrainian borders and co-operated to resolve the ongoing tensions in Ukraine. Further sanctions would not be in anybody’s economic interests, and it still looks likely there will be just enough compliance to avoid fresh sanctions. Still, hard politics are in play, so other outcomes are quite possible as well.
Prepare for payrolls – pressure for bonds
After all the excitement yesterday, more will be in store today. After all, it is payrolls Friday, meaning May US employment numbers will be released at 14:30 CET. A fall from the strong 288k rise seen in April seems inevitable, but another positive report still looks likely to be in the cards. The bond market sentiment has felt some pressure lately, and today’s US labour market data certainly has the potential to push yields further up.
Elsewhere in today’s calendar, the German April industrial production as well as April trade data will be released at 8:00 CET, the ECB’s Constâncio will speak at 11:00 CET, while the ECB will announce the latest 3-year LTRO repayment data at 12:00 CET.
In addition, the rating agency Moody’s has a chance to revise its ratings on Finland, the EFSF and the ESM, but no changes look likely and thus no reports will not be published. Standard & Poor’s, in turn, should report on their ratings on Italy and Ireland.
Nordea