Core bonds erased early gains and yields finally ended the day higher. The German 10-year yield edged up by around a bp, while the US 10-year yield climbed roughly as much. Intra-Euro-area spreads widened on a broad front.
European equity markets gave back some of their gains from Friday, with the Stoxx 600 slumping by 1.0%. US equities fared better, and S&P 500 ended the day roughly flat (down by 0.01%) after hitting new record highs earlier in the day. The retreat after new highs continues to suggest a further rally in US equities is meeting resistance around the current highs. Asian equities are trading mixed this morning in general, but Japanese equities continue to surge (TOPIX up by around 2.5%, though well below its intraday highs). European equities are set to open slightly lower.
Bonds found clear support yesterday in the aftermath of the strong US manufacturing ISM report (see more below), and core yields are likely to edge lower today.
US manufacturing sector continues to boom
The US manufacturing ISM index surpassed expectations with a jump from 56.6 to 59.0, equalling the 3-year high seen in August. The forward-looking new orders index jumped from 60.0 to 65.8, while the employment index gained from 54.6 to 55.5. The fall in the export order index from 53.5 to 51.5 suggests the index is driven by domestic strength. The manufacturing ISM index has overplayed the strength in the actual production data, but nonetheless is another strong signal from the US economy.
Greek bailout exit plans in focus again
The Financial Times writes, citing EU officials that Euro-area leaders are contemplating turning the around EUR 11bn of unused support originally earmarked for Greek banks into a credit line for Greece. A clean exit by Greece from its support programme looks impossible at this point, but moving to rely on a credit line would at least lighten the international monitoring Greece is under. The role of the IMF going forward remains in the dark, and if the Fund had no role going forward, the credibility of Greece’s reform efforts would no doubt suffer a big blow. The future plans for Greece are set to be discussed by the Eurogroup on Thursday.
US elections – do they matter?
The US mid-term elections will take place today, where the entire House of Representatives will be elected as well as a third of the Senate (or more specifically 36 of the 100 seats). The Republicans are very likely to retain control of the House, while they are the favourites to take over the Senate as well. Because some states hold runoff elections later, if no candidate secures more than half of the votes cast, the outcome may not be known yet tomorrow morning (European time).
From a market perspective, a clear result with Republican majorities in both chambers is likely to be the preferred realistic outcome, as such a setup would probably increase the chances of passing legislation compared to the current composition. Still, large remaining differences between the parties and a White House still held by a Democrat (with the power to veto) would probably prevent large-scale reforms even in such a scenario.
Elsewhere in today’s calendar, the ECB’s Cœuré will speak at 8:40 CET and Costa at 10:00 CET, while the European Commission will release its new economic forecasts at 11:00 CET. In terms of economic data releases, the Euro-area September PPI will be released at 11:00 CET, US September trade balance at 14:30 CET and US September factory orders at 16:00 CET.
Ireland prepares a new 15-year bond – Austria to auction bonds
Ireland mandated the leads for a new 15-year EUR benchmark yesterday. The launch is likely to take place today, and the money will be used for an early repayment of IMF loans.
On the auction front, Austria will sell bonds maturing in 2019 and 2024 for a combined EUR 1.1bn.
Nordea