Bonds rallied and equities took a beating yesterday on the back of geopolitical concerns, while curves bull-flattened. Uncertainty was created by reports that Russia was planning a law allowing the seizure of foreign assets in the country, among other things. The German 10-year yield sank by 3bp back below 1%, while the 10-year US Treasury yield plummeted by 6bp. The Eonia overnight rate, in turn, fell back into negative territory, albeit barely.
Intra-Euro-area spreads widened. Especially Spanish bonds should feel pressure going forward, as the question of a Catalan independence referendum is catching an increasing number of headlines. Catalan President Mas is expected to call the referendum for November tomorrow.
Core bonds are likely to find more support today, but the fall in yields should be smaller compared to the moves seen yesterday. Yesterday’s market action was a good reminder that if equity markets see a clearer correction lower, bonds should do well despite already low yield levels.
Equities took a beating especially in the US. European indices fell around 1%, while S&P 500 plummeted by 1.62%. Asian markets are trading mostly lower this morning as well, but the losses have been smaller than those seen in the US, and US equity futures have stabilized as well. Europe is set to open close to flat.
Carney prepares the ground for tighter policy
BoE’s Carney further warned yesterday that higher interest rates were getting closer. He said the judgment on when to raise rates had become more balanced in recent months, and the point at which interest rates also begin to normalize was getting closer. He added that while there was also uncertainty about the future, you could expect interest rates to begin to increase. His comments do not signal an imminent rise in rates, as wage and inflation pressures still seem limited, but with two Monetary Policy Committee members already in favour of raising rates, the discussion on rates at the BoE is becoming more heated.
Euro-area credit data offer a glimmer of hope
August credit data showed that while loans to the private sector continue to contract, at least the pace continues to moderate. Loans to the private sector, adjusted for sales and securitisation, contracted by 0.9% y/y in August vs. 1.0% in July. Looking at the loans forming the basis for the ECB’s targeted longer-term refinancing operations (TLTRO), the y/y pace of contraction moderated for the fifth month in a row, though these loans still fell by 2.7% y/y. The credit impulse of the TLTRO eligible loans, i.e. the annual change in the y/y growth rate, improved to 2.5%, which is the best number in more than three years. Even though no significant loan growth is in sight, there are cautious signs of better times ahead, since at least the pace of contraction is slowing.
More ECB speakers and Spanish budget ahead
Today’s economic data calendar looks rather light. The third release of US Q2 GDP will be out at 14:30 CET and final September University of Michigan consumer confidence at 15:55 CET.
The ECB will release next week’s LTRO repayments at 12:00 CET, while the ECB’s Coene will speak at 12:15 CET and Rimsevics at 13:00 CET. In addition, the Spanish government is set to present the first draft of 2015 budget at 13:15 CET.
Finnish AAA rating in jeopardy?
On the ratings front, Fitch is due to review its AAA rating with a stable outlook on Finland. Standard & Poor’s changed its outlook on Finland to negative earlier this year, and there has certainly not been any shortage of bad news for the Finnish economy during the past months. Still, Fitch is likely to retain the stable outlook. After all, it is clearly the rating agency that has the most lenient approach as far as rating Euro-area sovereigns is concerned. That said, risks for Finnish bonds are to the downside, as a confirmation of the stable outlook is unlikely to give the bond market any notable boost.
Beyond the Finnish rating, Standard & Poor’s has a chance to review its AA+ rating (stable outlook) on Austria.
Nordea