German bond yields plummeted again yesterday and the curve bull-flattened on the back of increasing QE hopes (see more below). Similar developments were seen in the US as well, though in smaller magnitude, as two Fed members (Lockhart and Williams, both non-voters this year but voters next year) signalled there was no rush to remove the Fed’s reference to rates staying low for a considerable period. The German 10-year yield ended the day lower by 7bp, while the corresponding US yield slumped by 5bp.
Intra-Euro-area spreads headed wider. Italian bonds initially underperformed on the back of Friday’s downgrade, but in the end the underperformance of vs Spain in the 10-year sector was only around a bp. Spreads are set to face more volatility for the remainder of the year, while clearer narrowing is likely to continue again early next year.
Core bond yields are likely to stabilize around current levels today. The supportive factors, especially in Europe, have not gone anywhere, and no bigger losses are thus in sight. In the US, strong employment data managed to cause only short-term damage.
Oil prices have continued their fall. The front contract of Brent has fallen already below USD 66, the lowest since 2009. The downtrend in prices remains intact, and further falls look likely in the near term.
Equities retreated on both sides of the Atlantic. The Stoxx 600 fell by 0.67%, while S&P 500 lost 0.73%. Asian markets are trading lower as well this morning, at least outside China, and Europe is set to open further down.
Nowotny boosting QE hopes
The ECB’s Nowotny’s comments on further ECB easing boosted EUR bonds yesterday. He said quantitative easing could certainly be useful, while the ECB was focusing specifically on government bonds, even though other bonds could be included as well. He added nothing had been decided on whether QE would be conducted according to the ECB’s capital key. Coming from a somewhat more hawkish Governing Council member, Nowotny’s comments increased expectations that the ECB would start government bond purchases early next year. Nowotny sounded quite pessimistic about the economy as well, talking about a massive weakening of economic momentum.
Greek uncertainty adding to volatility before year-end
The Eurogroup recommended a two-month extension to Greece’s bailout programme yesterday, as the country has not met the terms set for being able to conclude the programme at the end of this year. At the same time, the Eurogroup pledged Euro-area member countriesremain favourably disposed to granting Greece an ESM precautionary
credit line (ECCL), if Greece were to request this and subject to the finalisation of the reform measures that are still pending under the current review.
Prime Minister Samaras, in turn, called for early presidential elections for 17 December, originally set to take place in February. The vote will almost surely have three rounds, and the deciding vote is set to take place on 29 December. The government parties have only 155 members in the Greek parliament, while 180 are required to elect a president. If the government fails to elect a president, snap parliamentary elections would have to be called for early next year. The government has been lagging in recent polls behind the left-wing SYRIZA, whose policy proposals have created worries among investors.
Political uncertainty thus threatens to derail the Greek recovery once again, and at worst put Greece’s future in the Euro area in doubt again. Even though the spill-over effects to other Euro-area countries are much more limited than they once were, they are not non-existent, especially in thin December markets. Profit-taking could thus easily take intra-Euro-area spreads wider before year-end despite looming ECB bond purchases, while Greek bonds are set to take another hit.
UK industrial production and US small business optimism
Today’s economic data calendar does not look hugely interesting. UK industrial production data for October will be released at 10:30 CET, while in the US the NFIB small business optimism index will be out at 13:30 CET and the Job Openings and Labor Turnover Survey (JOLTS) at 16:00 CET. In addition, the ECB’s Makuch will speak at 12:00 CET.
US and Austrian issuance
Austria will re-open its 10-year benchmark for EUR 0.88bn today. This week’s US benchmark auctions, in turn, will be set in motion by the USD 25bn 3-year note offering.
Nordea