German bond yields ended the day higher yesterday despite low demand in the first TLTRO (see more below), to a notable extent due to the negative opening after higher yields in the US the day before. The 10-year yield ended the day higher by some 3bp. US yields, in turn, moved largely sideways, and closed the day slightly lower (10-year yield down by less than a bp).
Intra-Euro-area spreads widened modestly in the semi-core space, but narrowed outside it, with especially Spanish bonds performing. Spread narrowing is set to continue today.
Core bond yields will head higher this morning on the back of relief due to the Scottish vote (see more below), but bonds are likely to find support again later in the day.
The 5-year EUR inflation expectation 5 years forward, as implied by inflation swaps and followed very closely by the ECB, sank to around the lows of 2010, something that will cause additional worries for the ECB.
Equities had a positive day yesterday on both sides of the Atlantic. European equities gained around 1%, while in the US S&P rose to a new record high after a 0.49% advance. Asian markets are trading higher this morning as well, and Europe will open up.
Scotland stays – focus moves to Catalonia
With more than 95% of the votes counted, the no-side is more than 10%-points ahead in the question of Scottish independence, so the results look clear. A relief rally should be seen today, mostly in the UK but also in the Euro area in terms of higher equity prices and core bond yields and narrower spreads. The British pound has performed a lot already overnight, and is trading at its strongest level in more than two years vs. the euro.
The focus will now shift to Catalonia, where the regional parliament is set to vote on a bill enabling the Catalan government to hold a non-binding referendum on its independence from Spain. The Spanish government has vehemently opposed such a referendum, which it finds to be in violation of the constitution. The uncertainty over the Catalan question should limit the gains for Spanish bonds today.
First TLTRO a clear disappointment – boosts QE expectations
The first ECB targeted longer-term refinancing operation saw only EUR 82.6bn of demand – a clear disappointment after Draghi had said the ECB was aiming to expand its balance sheet considerably. Even though the December uptake should be clearly larger, the first allocation further illustrates that the current measures are not enough to reach the easing effect the ECB seems to be targeting. Expectations of a larger QE programme are set to increase again, supporting bonds and keeping the euro under pressure.
Today’s 3-year LTRO repayments at 12:00 CET will be more interesting than usual, as they will imply, how much of the TLTRO money was directly used to replace the LTROs.
And the losers are: Spain, Estonia, Ireland and Greece
The ECB released yesterday the rotation of voting rights in the Governing Council from the beginning of 2015, when not everybody will be allowed to vote at all meetings. The first Governors to lose their votes come from Spain, Estonia, Ireland and Greece. In practice, the rotation of voting rights is unlikely to have any major effects on the monetary policy decisions taken, and all Governors will continue to participate in the Governing Council meetings and discussions.
France facing another downgrade – G20 finance ministers to meet
There has been a lot of speculation that Moody’s would downgrade the French rating at its scheduled review today. A downgrade should not be a big surprise, considering Moody’s already has a negative outlook in place and its rating is a notch higher compared to Standard & Poor’s. A one notch downgrade coupled with a stable outlook should thus not deliver any bigger blows to French bonds.
Moody’s also has a chance to review its rating on the UK and Fitch on the US, but changes do not look likely.
Today’s economic data offerings look light.
During the weekend, G20 finance ministers and central bank deputies will meet to discuss the regulatory treatment of ABSs, among other things.
Nordea