Core yields saw somewhat mixed performance on Friday. German yields edged slightly higher, and intra-Euro-zone spreads narrowed, while US yields fell ahead of all the uncertainty ahead over the weekend.
The Eonia overnight rate hit almost 40bp already, the fifth consecutive increase and pointing to further money market tensions. Such levels are another argument for further ECB easing, though the recent fall in the EUR/USD is certainly welcome news at the ECB.
Yields are likely to rise today, after the uncertainty created by the recent elections (see more below) has diminished, but trading volumes will be greatly limited by the US Memorial Day and UK Spring Bank holidays.
Equities had a positive day on Friday. S&P 500 ended the day up by 0.42% at a fresh record closing high. Asian equities are trading mostly somewhat higher this morning.
French, Greek and UK election results raising worries
EU/euro-sceptic parties did well in many countries – though not by far all – in the elections for the European Parliament. Looking at the parliament as a whole, the European People’s Party (EPP) was set to remain the biggest group, though its share was set to drop from 274 to around 212, while the socialist S&P was set to be second with around 186 seats, down from 196. EU/euro-sceptic parties, in turn, were set to more than double their share of seats, and depending on the definition, were set to win more than 200 seats, though these parties do not form a united group. Still, pro-EU parties will retain a clear majority in the parliament.
EU-sceptic parties did well in a number of countries. They were the biggest party in e.g. France (National Front scored more than 25% of the vote), Greece (Syriza 26% of the vote) and the UK (UKIP more than 27% of the vote). In France and the UK, the election system should guarantee that these parties are still far from gaining a majority in national parliaments, but their strong showing will affect domestic policy. In Greece, on the other hand, where the election process awards a big bonus for the biggest party, the situation looks quite different, and a Syriza majority is not out of the question. Next Greek elections are not scheduled until 2016, but the wafer-thin majority for the coalition government will keep uncertainty in Greek politics high.
In general, the election results illustrate voters showing their dissatisfaction towards the recent policy choices, but the low voter turnout of 43% damps the message somewhat. The results were a blow to further EU/Euro-zone integration, but they do not mean that another crisis is around the corner. The longer-term consequences, however, are more notable.
Intra-Euro-zone spreads are likely to resume their narrowing trend heading into the ECB meeting. Greek bonds may be the exception, and see more pressure on the back of yesterday’s vote.
Ukraine elections result in a clear winner – positive for markets
The Ukrainian presidential elections resulted in a first-round win for Mr Petro Poroshenko. The win was dimmed to some extent by the fact that large parts of the Donetsk and Lugansk regions were unable to vote. The elections were carried out largely without bouts of violence, while Russian President Putin is expected to recognize the results. Even though the Ukrainian crisis is far from resolved, the market reaction to the results should be positive and the Ukrainian situation is likely to lose its position in driving markets more generally.
Holidays depress an already quiet week
This week’s economic data calendar looks very light, which leaves plenty of room for the markets to digest the weekend’s election results. Holidays will lighten the calendar even further. In addition to the US and UK holidays today, the Ascension Day holiday will limit activity on European markets on Thursday.
Something will of course happen in terms of economic data as well. Euro-zone April credit growth data and the May economic sentiment indicator are likely to underline the case for further ECB easing on Wednesday. In the US, May consumer confidence and March house price data will be released tomorrow, April pending home sales on Thursday and the Chicago PMI as well as the April personal spending report on Friday.
Today’s calendar looks very light. The focus will be on digesting the elections results and an ECB Forum on Central Banks that starts today and will include e.g. a speech by Mr Draghi.
Plenty more issuance ahead – Italian coupon & redemption payments looming
This week’s auction calendar looks rather busy. The Netherlands will re-open its 5-year benchmark for EUR 1.5 to 2.5bn tomorrow, while Italy will sell zero-coupon bonds for EUR 2.5 to 3bn and its 2018 inflation-linker for EUR 0.5 to 1bn on the same day. Germany will re-open its 2046 bond for EUR 2bn on Wednesday, Italy will sell benchmark bonds on Thursday.
In the US, USD 31bn 2-year notes will be sold tomorrow, USD 35bn of 5-year notes and USD 13bn of 2-year floaters on Wednesday and USD 29bn of 7-year notes on Thursday.
Coupon and redemption payments from EUR government bonds are not set to boost the market quite yet, as there are only some EUR 2bn of such flows in store. However, the more than EUR 20bn of coupon and redemption payments in store from Italian bonds in early June should boost Italian bonds already this week.
Nordea