Euro-area yields hit record-low levels on a broad-front yesterday, but yields then rebounded towards the evening despite crashing equity markets. The German 10-year yield was trading at around 0.86% before rebounding to some 0.90%, roughly unchanged from the day before. The US 10-year yield ended the day lower by 1bp. Intra-Euro-area spreads narrowed.
US equity markets plunged. S&P 500 ended the day lower by 2.07%, the biggest daily loss in more than eight months. Pressure for a more sizable correction lower in equity prices is clearly building, something that should give bonds another boost. European equities avoided bigger losses yesterday, but will take a big hit this morning. Asian markets are trading clearly lower as well.
Oil prices continue to plunge. The front contract of the Brent future plummeted below USD 90 yesterday for the first time since mid-2012. Clearly growth fears are hitting the energy markets as well.
Bonds are set remain supported today, and record-low yield levels could easily be tested in the Euro-area again. Risk sentiment remains wobbly, while a long weekend is ahead in the US due to the Columbus Day holiday on Monday, which will add to uncertainty.
Considerable time only two months?
The Vice Chairman of the Fed’s Board of Governors Fischer yesterday said the Fed’s reference to considerable time meant something between two to twelve months, and added he thought a good guess for the timing of the first rate hike would be around the middle of next year. Clearly the Fed wants to make play down the meaning of considerable time, but if it could mean as short a period as only two months, then that kind of a guidance would not really carry any significance and such comments could weaken attempts at vague forward guidance in the future.
The Fed’s Bullard (non-voter currently), in turn, warned markets were making a mistake in pricing in less tightening than the FOMC forecasts would imply. He repeated he though a good time to start tightening policy was in Q1 2015.
Finally, the ECB’s Draghi repeated the ECB is now transitioning from a monetary policy framework predominantly founded on passive provision of central bank credit to a more active and controlled management of the balance sheet, in an attempt to lift inflation from its low levels, and they are ready to alter the size and/or the composition of our unconventional interventions, and therefore of our balance sheet, as required.
Finland still worth AAA?
Standard & Poor’s changed its outlook on the Finnish AAA rating to negative back in April, and will review the rating today. The way things are developing in Finland, losing the AAA rating appears to be only a matter of time, but the time for a downgrade is unlikely to be here yet. After all, a downgrade already at this point from S&P would seem quite soon after a negative outlook. The other two major ratings agencies have affirmed their stable outlooks during the past few weeks.
In addition to Finland, S&P will review its AA rating on France (outlook stable), while Moody’s has a chance to evaluate its Baa2 (stable) rating on Italy, Fitch on Portugal (BB+ positive) and DBRS on Spain, the Netherlands and Italy. The DBRS rating on Spain is interesting, as it currently rates Spain in a higher category compared to the big three, and a downgrade would affect the collateral value of Spanish bonds at the ECB. Despite the negative outlook on the AL rating, the recent performance of the Spanish economy should prevent a downgrade today.
A flood of central bank speeches ahead
In the absence of major economic data, the main focus will be captured by the flood of central bank speakers on the agenda. The Fed’s Plosser will speak at 15:00 CET, the ECB’s Constâncio at 16:00 CET, the ECB’s Linde at 18:50 CET, the Fed’s George and the ECB’s Nowotny at 19:00 CET, the ECB’s Praet & the Fed’s Fisher at 20:00 CET, the Fed’s Lacker at 21:00 CET and the BoE’s Forbes at 21:00 CET.
On the economic data front, French August industrial production numbers will be released at 8:45 CET and Italian ones at 10:00 CET. In addition, the ECB will announce the latest 3-year LTRO repayment data at 12:00 CET, and the Greek parliament will vote on the confidence of the government.
Nordea