German bond yields continued to rise yesterday on the back of reports of a cease-fire in Ukraine, but these moves were not carried over to the US, where yields ended the day lower. The daily change for the German 10-year yield was a rise of around 2bp, while the corresponding US yield retreated by roughly as much. Spanish and Italian bond spreads vs Germany continued to tighten.
German yields are set to trade with a small upward bias this morning, as new supply will weigh, but expectations should have largely adjusted already to an ECB not providing further stimulus at this time. Still, positive US data will likely keep some pressure on bonds in the afternoon. Adverse developments in Ukraine continue to have potential to boost bonds, though.
European equity markets recorded gains of around 1% yesterday, but the sentiment soured in the US, and S&P 500 ended the day marginally lower. Asian markets are trading mixed this morning, and Europe is set to open close to flat.
Conflicting news from Ukraine – EU continues to plan more sanctions
Core bonds took a beating yesterday on news that Ukrainian President Poroshenko and his Russian counterpart Putin would have reached a permanent cease-fire agreement. However, the Russian side later clarified that what was agreed were steps towards a cease-fire, while fighting continued, and also the Ukrainian side tweaked the earlier statement later. This conflict continues to look far from resolved, and will still capture headlines in the near future. Yesterday’s news has not at least so far taken further sanctions on Russia off the table.
NATO leaders will gather to a 2-day summit today, and Ukraine will certainly be one of the main topics. News of a cease-fire looking more remote certainly continues to have potential to move markets.
Composite PMI data confirms the loss of momentum in the Euro area
The Euro-area composite output PMI was revised lower from the flash estimate of 52.8 to 52.5 (53.8 in August), confirming the recent loss of momentum. The downward revision was largely due to weaker services in both France and Germany compared to the flash estimate. There were some bright spots, though: the Irish composite output PMI surged to a 14-year high, while also the Spanish index recorded its best reading in more than seven years.
Portuguese and Finnish bond issues finding good demand
Portugal launched a new EUR 3.5bn 15-year benchmark yesterday. Pricing took place of 235bp above mid-swaps, tighter than the initial price guidance of low 240s vs swaps. Order books were reported to have topped EUR 8bn. The new bond thus saw good demand, and continues to amass a large cash buffer to shield it from a deterioration in market conditions.
Finland, in turn, priced a USD 1.5bn benchmark at -2bp vs mid-swaps, somewhat tighter than the initial price thoughts. The order book totalled around USD 3.4bn.
ECB not ready to do more yet
ECB easing expectations were boosted by Mr Draghi’s comments in Jackson Hole that the Governing Council would acknowledge the recent fall in inflation expectations and within its mandate will use all the available instruments needed to ensure price stability over the medium term. However, the ECB has also made clear it wants to see the effects of the June easing package before contemplating further easing. Especially as inflation expectations have corrected slightly higher since the Jackson Hole speech, the ECB should be happy with soft words for now. Preparations for the ABS purchase programme, in turn, are likely to have edged forward, but a detailed programme announcement is unlikely to see daylight yet.
The recent market moves suggest expectations have already been adapted ahead of the meeting to a no-policy-change scenario, and bonds should not take a further notable hit on the ECB’s message. The interest rate announcement will be announced at 13:45 CET, while the press conference is set to start at 14:30 CET. For more on the ECB.
Today’s calendar has other interesting entries as well. In Europe, the German July factory orders will be out at 8:00 CET, Swedish Riksbank will release its monetary policy decision at 9:30 CET and BoE’s policy announcement will see daylight at 13:00 CET.
In the US, the ADP employment report will be out at 14:15 CET, weekly jobless claims, July trade balance and revised Q2 productivity and unit labour cost data at 14:30 CET and the non-manufacturing ISM index at 16:00 CET. In addition, the Fed’s Mester will speak at 18:30 CET.
Spain and France set to sell bonds – also Greece in the pipeline again
Action will continue on the auction front today in the form of Spanish and French auctions. Spain will offer bonds maturing in 2024 and 2044 for a combined EUR 2 to 3bn, while France will sell bonds maturing in 2024, 2030 and 2045 for a total of EUR 8 to 9bn. These auctions are likely to put some upside pressure on longer yields this morning.
Greece, in turn, is planning to sell 7-year notes by the end of this year, and convert existing T-bills into longer-term borrowing, according to a Greek government official.
Nordea