The German 10-year yield sank to a yet another record-low of 67bp yesterday, but rebounded a bit later to end the day lower by around half a bp. US yields recorded bigger falls, and the 10-year yield dropped another 5bp to around the lows seen early this month.
Intra-Euro-area spreads continued to widen. The Greek 10-year yield approached 9% already earlier in the day, but ended at just above 8.5%. The Greek curve has inverted again, and e.g. the bond maturing in 2017 is yielding more than 9% implying default fears have increased again.
Core bonds will likely stay supported today, as low demand at the ECB’s second TLTRO should boost expectations of more easing measures early next year (see more below).
European equities lost another 0.34% (Stoxx 600), while S&P 500 suffered a bigger fall of 1.64%. The technical picture has deteriorated clearly in equity markets in the past few days, implying more weakness ahead. Asian markets are trading lower as well this morning, though have recovered clearly from their intraday lows. European markets are set to open lower as well.
Oil prices still in free fall
Falling oil prices continue to support expectations that Euro-area inflation will soon fall into negative territory, putting the ECB in an increasingly uncomfortable place. The front contract of Brent has fallen below USD 65 already, quite a drop from the levels of above USD 100 as recently as September. Prices tried to establish support around USD 70 early this month, but failed, and the momentum clearly continues to favour a fall towards USD 60.
Lower oil prices should be good news for the global economy in general, though they naturally do not affect all countries equally. In the Euro area, they increase pressure on the ECB to act, but at the same time should contribute to a gradual economic recovery.
French reforms showing some progress, but more needed
The French government unveiled further reform proposals yesterday, including measures to allow shops to be open more freely, open up regulated professions and open long-distance bus routes to competition. The proposals have already felt pressure coming from the left of the Socialist party, which raises risks that the proposals will be watered down before implementation.
Hopes are increasing that the French government is finally stepping up its reform efforts, but opposition coming from inside the Socialist party illustrates the difficulties the government is facing in implementing reforms. The proposals unveiled yesterday are a good step to the right direction, but do not go nearly far enough in reforming the French economy. Plenty of work lies ahead.
Second TLTRO to lack in demand as well
Today’s calendar is by far the most interesting this week. The ECB will announce the allotment of the second targeted longer-term refinancing operation (TLTRO) at 11:15 CET. The allotment is likely to come in on the low side, though be somewhat bigger than the first TLTRO of EUR 82.6bn. A number of around EUR 120bn would mean banks borrowed only roughly half the theoretical maximum in the first two TLTROs. As a low number will probably immediately boost expectations of more action from the ECB in terms government bond purchases, the market reaction is likely to be modestly lower yields. However, considering where core yields are already trading, the reaction is unlikely to be big.
In the US, all eyes will be on the November retail sales report at 14:30 CET, which should support the picture of good momentum in the economy. Weekly jobless claims will be out at the same time.
In addition, more doubts about the passage of the bill averting the government shutdown have emerged after last-minute provisions inserted into the law ahead of today’s deadline. Nobody following US politics should be surprised that things are never made too easy. Passage of the bill still looks likely.
Elsewhere in the calendar, French November inflation data will be out at 8:45 CET, Italian October industrial production at 10:00 CET, while the ECB’s Liikanen will speak at 10:00 CET.
On the issuance front, the US will offer USD 13bn of 30-year bonds.
Nordea