Markets were once again dominated by growing fear as geopolitical tensions intensified. Among others, the US airstrike in Iraq, escalating situation in Ukraine and fighting in Gaza pushed yields lower. The weak sentiment resulted in safe haven bonds getting wide support on Friday. The move was partly reversed by the end of the day though.
German 10-year Bund yield made new all-time lows dropping to 1.02% before closing at 1.05%. The German 2-year yield dropped again to negative levels illustrating investors being willing to pay for parking their cash somewhere. Yield ended the day slightly positive at 2bp. The Euro area sovereign bond spreads also felt the pressure.
In the US the 10-year Treasury yield dropped to 2.35%, the lowest level since June 2013, before ending at 2.42%.
With the upbeat equity markets in the US and Asia, the German Bund yield is likely to head slightly higher this morning. However, if the geopolitical worries again escalate, the Bund yield will continue its way below 1 %.
Euro area heading for zero
In the euro area the most interesting data point is the second quarter GDP out on Thursday. We expect zero growth from the previous quarter, well below the consensus of 0.2%.
Weak numbers are likely to support expectations for easy monetary policy to continue and press rates and euro lower.
Finland is the new Spain?
Spain surprised to the upside earlier with its GDP numbers. Finland might do the same and the second quarter GDP can come out higher than one would assume considering the situation.
We expect the GDP to grow by 0.3-0.7% from the previous quarter. The flash numbers are, however, not a very good predictor of the underlying growth and they should be corrected closer to zero growth later on.
Renzi’s reforms take a tiny step forward
In Italy the Senate passed the first hurdle of the constitutional reform bill on Friday. The bill aims at e.g. reducing the size and powers of the Senate to avoid a parliamentary stalemate that took place after the last elections.
Structural measures promised by Renzi are still to be seen, and with the last week’s poor GDP numbers the time is running out. Italian 10-y spreads widened by some 20bp last week and the correction has more room to run.
Some auctions on the pipeline
The US auctions 27bn, 24bn and 30bn dollars of 3-, 10- and 30-year bonds. Germany is on the markets with 10-y bonds worth 4bn euros on Wednesday. Italy has canceled its medium to long term auctions this week due to large cash availability.
Elsewhere on the calendar we have e.g. BoE inflation report, Euro area industrial production and second release of inflation, US retail sales, Chinese credit and productions numbers and Japanese GDP.
Nordea