rowing hopes the ECB will to do more pressured yields to new lows once more in Euro area. Moves were driven by the Draghi speech on Friday and the lackluster economic outlook for Germany.
Draghi firmly stated ECB has noted inflation expectations dropping recently and is ready to do more if needed. German Ifo surprised on the downside.
The German Bund yield dropped below 0.93% during the day finishing near 0.95%. The 5-year swap rate visited levels below 0.48%. German 2-year bond yield was pressured to negative levels again. At -0.046 during the day the 2-year yield touched the new lows since May 2013.
QE speculations also pressed periphery yields to new lows. Spanish and Italian 10-year yields came down by more than 10bp, whereas Portuguese 10-year yield slid 20bp to below 3% marking the new all-time low.
In the US the 10-year Treasury yield edged slightly lower to 2.39% and the spread to the German counterparts was at its highest since 15 years.
With only second tier data coming out today, markets are focused on political news flow. After big moves yesterday, some profit taking is likely with yields edging only slightly higher.
Putin to meet Poroshenko
Today the Russian president Putin is set to meet Ukrainian president Poroshenko in Belarus. The meeting is a step into right direction. However, with tensions flaring on the border, the conflict is unlikely to be solved today.
French political mess
In France the Socialist government is reshuffled again and the new government is expected to be announced today.
With the poor economic outlook, France needs urgently reforms. Political crisis is the least what the country needs. The market does not mind, however, as the liquidity chasing all assets is pressuring also the French yields lower.
German outlook weakens
Ifo components continued their way down, driven by manufacturing. However, sentiment was also down in the retail sector. That’s worrying because private consumption is the main growth driver of the German economy.
The best thing that could happen to the German economy would be an easing of geopolitical tensions and true efforts by France to revive the economy. Both very uncertain.
Based on Ifo numbers, one should not expect more than a technical rebound from Q2, not one driven by true momentum.
Second tier data from the US
After yesterday’s weaker than expected US new home sales data, today we get more color on the housing market from the Case-Schiller index. In addition, durable goods, consumer confidence (Conference board), and Richmond Fed are in the pipeline.
Spain issues short-term bills and Italy auctions zero coupon bonds. The US Treasury will sell $29 billion in two-year notes.
Nordea