European equity prices plunged yesterday, as Draghi’s message did not sound as dovish as many were hoping. The Stoxx 600 index plummeted by 2.40%, the biggest daily loss in more than a year (Italian equities lost nearly 4%). Intra-Euro-area spreads widened, but the moves were modest compared to the massacre that took place in the equity markets. Spanish and Italian 10-year spreads to Germany widened around 4bp.
German yields ended the day slightly higher as well, but the falling equity prices limited the losses for bonds. US equities managed to rebound later, and S&P 500 closed flat. US Treasuries felt more pressure, and the 10-year yield climbed by 4bp. Asian equities are trading mostly somewhat lower this morning, but European markets should still open higher.
Core yields are likely to continue to creep higher today, while the US payrolls report has the potential to make a bigger dent in the demand of bonds (see more below). The Day of German Unity holiday will limit trading volumes to some extent.
Oil prices continued to plunge yesterday. Prices have been falling since the summer, but the pace of decline has only increased in the past few days. The Brent front contract was already approaching USD 90 yesterday, while the June peaks stand at just below USD 114. Prices recovered later, and currently trade at around USD 94.
ECB short on details, long on hope
The details the ECB offered about its covered bond and ABS purchases were not particularly convincing. Draghi took a step back from the ECB having an explicit balance sheet target, while he was optimistic on the effect of the measures taken so far. Especially after the first TLTRO saw only low demand, it looks unlikely that the ECB could significantly steer its balance sheet towards the dimensions it had in early 2012 with the TLTROs & covered bond and ABS purchases. If the central bank wants to hit this target, it needs to expand its bond purchase programmes further to include also government bonds. In light of the message still leaving plenty of question marks, some more profit taking in the bond markets looks likely: higher core yields and wider intra-Euro-area spreads.
Wage growth to spike at least temporarily?
The growth in average hourly earnings in the US has not shown any real signs of picking up, and in the past six months, the monthly change has been between zero and 0.2% m/m, which has kept the annual change at around 2%. The time may be finally ripe for earnings to have jumped by 0.3% m/m in September, something that together with a clear rebound in payrolls growth should push bond yields somewhat higher again after the recent considerable falls. The US September employment report will be released at 14:30 CET.
Elsewhere in the calendar, final Euro-area services and composite PMIs will be released at 10:00 CET, UK services PMI at 10:30 CET, Euro-area August retail sales at 11:00 CET and the US non-manufacturing ISM index at 16:00 CET.
In the ratings calendar, Moody’s has a chance to review its Aaa rating on Finland, but is unlikely to make changes even to the stable outlook.
Nordea