German bonds recorded some gains early yesterday, but the market mood changed later on the back of a report suggesting the ECB was pondering new easing measures (see more below). The German 10-year yield finally ended the day up by 2bp, while the US 10-year yield climbed by 3bp. Intra-Euro-area spreads narrowed across the board on more easing hopes, but volatility remains considerable.
Equities rallied hard on both sides of the Atlantic. In Europe, the Stoxx 600jumped by 2.12%, while in the US S&P 500 advanced by 1.96%. The gains have been extended to Asian markets, and European markets are set to open further up.
Better risk appetite is likely to push core yields further up today, while intra-Euro-area spreads will probably narrow a bit more.
ECB rumours driving markets
Markets cheered yesterday, as Reuters reported that the ECB was contemplating corporate bond purchases. The ECB denied it had made any decision on such matters. The EUR corporate bond market (bonds eligible as ECB collateral, excluding financials) is roughly the size of the covered bond market, but carries a lot more risk. As the ECB has made its opposition to assuming much credit risk very clear, it does not look likely the ECB would target at least lower-rated corporate bonds (at least without guarantees), while such a programme would benefit larger companies at the expense of smaller ones. Clearly, the ECB continues to look for more possible ways how it could provide more easing.
Commission set to warn France and Italy on their budgets
The Financial Times writes that the European Commission would warn five Euro-area countries today – France, Italy, Austria, Slovenia and Malta – that their budget plans risk breaching EU rules. Under the new rules, the Commission is required to send the budget back to the government in question within two weeks of submission, if there is serious non-compliance. Further, if the Commission is contemplating such a move, it needs to give a notification within one week, which would be today. The notification would not mean a definite rejection of a budget, however.
Both the French and Italian budgets deviate clearly with what the two countries had previously agreed with the Commission, so if the Commission does not reject these budgets, it would imply the new rules are not much more than a joke either. A compromise looks likely, in which the previous targets will be loosened further, but which would anyway go longer than the current budget proposals.
US inflation pressures still limited – Germany to sell 30-year bonds
The highlight in today’s calendar is the US October inflation data at 14:30 CET. Core inflation is expected to stay put at 1.7% y/y. As the pricing of the first Fed tightening move has already been pushed longer into the future lately, the market reaction would likely be stronger in response to an upward surprise.
Elsewhere in the calendar, the Bank of England will release its minutes at 10:30 CET, while the ECB’s Linde will speak at 18:15 CET. The European Parliament, in turn, is set to vote on Mr Juncker’s proposed commissioners at 12:00 CET.
Bond auctions will continue with the EUR 2bn German DBR 2.5% Aug 2046 offering.
Nordea