Bond yields continued to fall on both sides of the Atlantic on continued growth concerns and weak risk appetite. The German 10-year yield edged lower by a further 2bp, while the corresponding US yield descended by 3bp.Curves bull-flattened, while intra-Euro-area spreads widened.
Equity weakness continued. European markets took a beating of around 1.5%, while in the US S&P 500 lost another 1.15%, leaving the index at its lowest since early August. Asian markets have continued to head lower overnight, and Europe will record further losses this morning. In Europe, the Stoxx 600 has already fallen to its lowest since March, and further losses ahead look likely.
Core bond yields will likely creep a bit higher today, as China’s September trade data beat expectations (exports up 15.3% y/y vs expected 12.0% and imports 7.0% y/y vs expected -2.0%), but continued weak risk appetite and the US Columbus Day holiday should keep the moves limited.
Previous rating king slaughtered – also French rating with renewed pressure
The rating agency Standard & Poor’s delivered the latest blow to the already ailing Finnish economy on Friday, when it stripped Finland of its precious AAA rating (to AA+ with a stable outlook). Finnish bonds should feel more pressure on the back of the move, but the losses are likely to end up being contained for now. Because of the weak momentum in the Finnish economy, we remain negative on Finnish bonds.
S&P also changed its outlook for the French AA rating from stable to negative, citing the deteriorating budgetary position in light of France’s constrained nominal and real economic growth prospects. S&P already has the weakest rating on France among the three major agencies, and the negative outlook should add pressure on French bonds, which already trade above Belgium in some maturities.
Fed increasingly concerned about global growth prospects
Two members of the Fed’s Board of Governors voiced concerns of global growth prospects over the weekend. Vice Chairman Fischer warned that if foreign growth was weaker than anticipated, the consequences for the US economy could lead the Fed to remove accommodation more slowly than otherwise. Governor Tarullo, in turn, said he was worried about growth around the world, and there were more downside risks than upside risks, which was obviously something that needed to be taken into consideration in the Fed’s own policies. Clearly then, the Fed has become more worried about the global outlook lately, and the chances of monetary tightening being pushed further into the future have risen once again.
US retail sales, corporate earnings, Draghi and Yellen ahead
Central bank speeches continue to be monitored very closely for new monetary policy signals, especially if the speakers are the ECB’s Draghi and the Fed’s Yellen. Draghi will speak in Frankfurt on Wednesday, while Dr. Yellen will have her turn on Friday.
On the economic data front, the highlights include US September retail sales and PPI on Wednesday, Chinese September inflation on the same day and US housing market data on Thursday and Friday.
The corporate earnings season will only really get going this week, though only tomorrow, with 53 S&P 500 companies due to report during the week.
In today’s calendar, the ECB’s Praet will speak at 14:00 CET, while Euro-area finance ministers will meet to discuss EU recommendations to member states on fiscal and economic policy at 14:30 CET.
Italy setting the supply week in motion
This week’s EUR government bond auctions will start today with Italian offerings. The country will auction a new 3-year benchmark for EUR 3 to 3.5bn as well as re-open its 7-year benchmark for EUR 1.5 to 2bn and the 30-year one for EUR 0.75 to 1.25bn.
The Netherlands will tap its 3-year benchmark for EUR 2.5 to 3.5bn and Germany its 2023 inflation-linker for EUR 1bn tomorrow. Later in the week, Germany will re-open its 2-year benchmark for EUR 4bn on Wednesday, while Spain and France are set to sell bonds on Thursday. France will sell 3-, 4- and 5-year nominal bonds for a combined EUR 6.5 to 7.5bn and three longer inflation-linkers for EUR 1 to 1.5bn. Spain, in turn, will sell bonds maturing in 2024 and 2028.
Coupon and redemption payments from EUR government bonds will amount to around EUR 8bn this week. The bulk of these will stem from Portuguese bonds.
Nordea