Bonds rallied hard on both sides of the Atlantic on increasing geopolitical tensions, while curves bull-flattened. The German 10-year yield plummeted by 4bp to 1.15%, only a couple of basis points from its record lows reached in 2012. The US 10-year yield, in turn, plunged by 8bp to around 2.45%, the lowest since late May.
Intra-Euro-zone spreads held on rather well, and there was only modest widening, as yields continued to fall also outside the semi-core countries. The 10-year yields of several semi-core countries plummeted to the lowest levels on record.
Equities were under pressure. Prices fell by around 1% in both Europe and the US (S&P 500 down by 1.18%). Asian markets have also been mostly under pressure this morning, though the moves have not been particularly large and Chinese equities are actually trading higher despite news that new-home prices fell in 55 of the 70 cities followed in June. European equities are set to open further down.
Geopolitical concerns take centre stage ahead of the weekend
The geopolitical worries have only increased in the past 24 hours. Following the announcements of new sanctions placed on Russia, the news flow took a turn for even worse. A Malaysian Airlines plane carrying 298 people was apparently shot down in the east Ukraine region of Donetsk. The different sides have put the blame on the opposite side, but it is safe to say this will only escalate the tensions between Ukraine, Russia and the EU & US. According to The Wall Street Journal, the US intelligence agencies are divided over whether the missile was launched by the Russian military or by pro-Russia separatist rebels. The separatists, in turn, have blamed Ukraine for the shooting.
If that was not enough to stomach for one day, Israel launched an open-ended ground invasion of Gaza yesterday evening, which is set to lead to a significant increase in casualties.
There thus does not seem to be a shortage of factors supporting the demand of core bonds at the moment. With all the tensions ongoing, bonds should continue to perform today ahead of the weekend, and the German 10-year yield could easily see new record lows as early as today. Also more generally, there are currently plenty of factors that could further push bond yields lower, including a correction in the equity markets, subdued Euro-zone inflation and the favourable seasonal pattern.
Mixed US data – Bullard sees early rate hikes
Yesterday’s US economic data was mixed. Both building permits and housing starts plunged for the second month in a row. Fortunately, the recent rise in the NAHB housing market index suggests the outlook would have picked up again. On the more positive side, initial jobless claims fell further, while the Philadelphia Fed manufacturing index surged from 17.8 to 23.9, the best reading in more than three years.
The Fed’s Bullard (non-voter this year), in turn, said if macroeconomic conditions continue to improve at the current pace, the normalization process of monetary policy may need to begin sooner rather than later. His comments support what Dr Yellen implied already earlier this week: if economic data maintains the current momentum, rates will have to be raised earlier than the Fed’s current forecasts imply.
No ABS purchases from the ECB for a long while
The ECB’s Hansson commented that an ABS purchase programme takes time and is not going to help with immediate issues, so it was more of a medium-term plan somewhere down the road. His comments support our view that ABS purchases are not around the corner, and such a programme could surface very late this year, at the earliest.
US consumer confidence and euro debate ahead
Today’s calendar does not look hugely exciting. The IMF’s Lagarde and the German Finance Minister Schäuble will hold a panel discussion on the future of the euro at 11:00 CET, Chancellor Merkel will hold a news conference at the same time, the ECB will announce the latest 3-year LTRO repayment data at 12:00 CET, the ECB’s Weidmann will speak at 12:30 CET, while the EU and US negotiators will hold a press conference on the trans-Atlantic trade talks at 15:30 CET.
In the US, preliminary July University of Michigan consumer confidence will be released at 15:55 CET and the June leading index at 16:00 CET.
Nordea