Bond yields jumped and curves steepened on the back of an upward surprise in Euro-area PMIs and rallying US equities, helped by positive corporate earnings reports. The German 10-year yield climbed by 3bp, while the US 10-year one jumped by almost 6bp.
Intra-Euro-area spreads continued to narrow, by 1-2bp in the semi-core and 4-5bp for Italy and Spain in the 10-year sector vs Germany. Some widening looks likely today.
Core yields are likely to head lower today on the back of the uncertainty created by the looming ECB/EBA stress test results (see more below). In addition, the news of a first Ebola case in New York has led to some flight-to-quality overnight. The case concerns a doctor returning from an Ebola treatment centre in Guinea, and as such should not be a big surprise, but the market reaction suggests considerable sensitivity remains to news of new Ebola infections in the developed world.
Equities had a positive day. In Europe, the Stoxx 600 closed higher by 0.66%, while in the US the S&P 500 advanced by 1.23%. The latter has now recovered by more than 7% from this month’s lows, while it remains only slightly more than 3% away from the record highs. Even a small downward correction thus continues to quickly attract new buying, but volatility and thus the risk of a bigger correction lower have increased. Asian equities are trading mixed this morning, and Europe is set to open lower.
Rise in PMIs offers only a glimmer of hope
The Euro-area composite output PMI rose marginally from 52.0 to 52.2, but coming against expectations of another fall, it was a small sigh of relief. The manufacturing PMI rose from 50.3 to 50.7, while the services PMI was unchanged at 52.4.
Unfortunately, the details were worse than the composite output PMI suggests. The composite new orders index fell from 51.4 to 50.6, the fourth fall in a row. The employment index, in turn, fell below 50 for the first time in seven months. Further, despite the modest rebound, the composite output PMI remains at its second weakest level seen this year.
The data suggest the talks of another Euro-area recession have been premature, but the picture of weak economic performance remains.
China’s property market continues to cause worries
Fresh data showed new home prices dropping in 69 of the 70 cities monitored compared to the prior month in China in September. In August, prices fell in 68 cities. According to calculations by The Wall Street Journal, the average price for new homes fell by 1.1% y/y nationwide, the first negative number since late 2012. The slump in prices has thus not been huge so far, but has been gathering pace and a property market crash continues to be a risk facing the Chinese economy. The authorities have introduced measures lately to support the housing market, including loosened mortgage restrictions, and can continue to do so as needed in the hope of being able to engineer a soft landing.
BTP Italia finding sizable demand again
Italy announced its seventh BTP Italia bond – an inflation-linked bond linked to Italian inflation and targeting retail investors to a large extent – amounted to EUR 7.5bn, of which retail investors took EUR 4.6bn. The size of the latest issue dwarfs in comparison to the two previous issues, which amounted to more than EUR 20bn, but also the real coupon offered was lower. The BTP Italia instrument thus continues to illustrate how Italy is able to tap its wealthy retail investors to help meet its vast funding needs.
Handling the stress
The long-awaited ECB/EBA stress test results will be finally be released on Sunday at 12:00 CET. The results are bound to include failures, but their scope and scale should not cause another shock to markets. After all, the exercise is based on information from the end of last year, i.e. is very out-dated, while many banks have already improved their capital position since. As a result, the actual capital needs are likely to be considerable smaller than the test results would imply.
The results could thus easily lead to some relief in the markets on Monday, meaning somewhat higher core yields, narrower spreads and a steeper curve. In the opposite, the uncertainty today ahead of the results is likely to lead to some risk aversion and slightly lower yields.
Russia equals junk?
The rating agency Standard & Poor’s is set to review its rating on Russia today. The negative outlook on the BBB- rating has been in place since April, and the recent fall in the oil price has not been good news for the Russian economy. A downgrade to junk would deliver another blow for the country.
In Euro-area ratings, Standard & Poor’s and Fitch have their rating review dates on Cyprus, Moody’s on Austria, Germany and Luxembourg and Fitch also on Italy and Spain.
UK GDP and US new home sales ahead
The highlights in today’s data calendar include the UK Q3 GDP numbers at 10:30 CET and the US September new home sales data at 16:00 CET. In addition, the ECB’s Praet will speak at 10:20 CET.
Nordea