Core bonds rallied further yesterday, curves bull-flattened, intra-Euro-area spreads widened and equities tanked, as Greek worries rattled markets once again. The German 10-year yield ended the day down by 3bp at 69bp, hitting a new record low, while the US 10-year yield fell by 4bp to just above 2.20%.
Italian bond spreads vs Germany jumped by 12bp in the 10-year sector, while the Greek 10-year yield surged by more than 90bp back above 8%. However, it could have easily been even worse for Greek bonds, as the Greek equity market tanked an amazing close to 13%. For more on Greece.
Core yields are likely to edge a bit higher today after yesterday’s falls, as equities find support, but no big moves are expected.
European equities took big losses in general as well, and the Stoxx 600 ended the day down by 2.33%. US equities did better, and S&P 500 finally closed almost flat (down by only 0.02%). Asian markets are trading mixed this morning, with Japanese equities down by some 2%, but Chinese equities are trading higher. Chinese markets have been helped by soft inflation data (November inflation fell from 1.6% y/y to 1.4% y/y, below expectations), which supported expectations of more easing measures. European markets are set to open higher.
ECB overwhelmingly supporting QE
The ECB’s Makuch said yesterday that the overwhelming majority of governors supported the QE at the December meeting, adding that the probability of non-standard measures had grown. His comments support the picture that Draghi will have the votes to back the announcement of a broad-based asset purchase programme early next year.
US government shutdown averted once again
US House and Senate lawmakers reached an agreement on a close to USD 1.1 trillion funding bill, which would fund most of the government through September 2015. The bill will thus avert a government shutdown. Both the House and the Senate still need to vote on the bill, but its passage looks very likely. The bill would fund Homeland Security Department only through February, implying a fight over immigration reform will be taken early next year, when Republicans have control of both houses of Congress. As time is running out ahead of the Thursday deadline, Congress may have to pass a short-term stopgap measure to keep the government running for a few days and allow time for the passage of the larger bill.
The agreement illustrates US lawmakers have become more reluctant to using a possible government shutdown or the debt ceiling as means to advance their policy goals, which decreases political uncertainty in the US to some extent. However, plenty of political fights will still be ahead, and the outlook for agreeing on longer-term reforms before the next Presidential elections in 2016 is not great.
Light data calendar
Also today’s calendar looks rather light. French October industrial production data will be released at 8:45 CET, while the ECB’s Linde will speak at 9:30 CET and Hansson at 10:00 CET. In addition, the new European Commission headed by Mr Juncker will be sworn in at 14:00 CET.
German and US supply
Supply activity will continue today. Germany will re-open its 2-year benchmark for EUR 4bn in the last German auction of 2014, while the US will offer 10-year notes for USD 21bn.
Nordea