German yields initially headed higher yesterday, but all that changed, when equity market falls accelerated. The German 10-year yield finally ended the day close to unchanged, but US Treasuries rallied in earnest. The 10-year US yield plummeted by 8bp to its lowest in more than a month, and the US curve bull-flattened.
Intra-Euro-area spreads continued to widen, with especially Greek bonds still taking a hit on the back of worries regarding the Greek bailout and political concerns.
Weak risk appetite is set to keep bonds supported, but upside pressure for yields could easily stem from the Fed minutes in the evening.
Equities plunged on both sides of the Atlantic. S&P 500 suffered a loss of 1.51% and the beating was of the same magnitude in Europe. The Stoxx 600 is now at its lowest since mid-August, while S&P 500 is still doing a bit better. The equity market momentum has clearly weakened, and more losses are likely ahead. Asian markets are trading mostly lower as well this morning, but the losses have in general been more contained to what was seen in the US and Europe yesterday. European markets are set to open further down.
IMF warns of frothy equity markets
The International Monetary Fund revised its growth forecasts lower again yesterday, called for willingness from the ECB to do more amidst growing deflation risks, while it joined the growing chorus warning of high equity valuations. The IMF said downside risks related to an equity price correction in 2014 had risen, consistent with the notion that some valuations could be frothy. Such comments spooked equity markets, but do not really help investors overcome a major challenge: with yields on fixed-income instruments at depressed levels, the equity markets are at least offering some prospects of better returns – naturally not without risks. Amidst limited alternatives elsewhere, many will prefer the prospects offered by the equity markets, but it is not hard to argue there is room for a more sizable correction lower in equity prices.
German industrial production plunges
The German industrial production plunged by 4.0% m/m in August after a 1.6% advance the month before. Unless production rebounded by more than 4% in September, industrial production ended up falling in Q3 as well. The German economy may not have fallen to a technical recession in Q2 and Q3, but it will be close.
Belgium finally with a government
Almost five months after the parliamentary elections, four Belgian parties, including the Flemish separatist N-VA party for the first time, agreed to form a government. The new government will aim for a structurally balanced budget in 2018, two years later than previously planned. The easing of fiscal targets appears to be a common trend at the moment – at least outside Germany. Markets have gotten used to Belgium being without an official government for long periods of time, and such political uncertainty has not really been a burden to Belgian bonds lately.
Spanish linker gathers strong demand again
The new Spanish 5-year inflation-linker amassed an order book of close to EUR 12bn, while the EUR 5bn linker was priced at the tight end of the indicated guidance. The demand picture thus continues to support Spain’s venture into the inflation-linked bond market.
Fed minutes more hawkish than the statement?
The highlight in today’s calendar will be the release of the Fed minutes at 20:00 CET. The statement following the Fed’s most recent meeting kept its forward guidance unchanged, but the median FOMC interest rate forecasts were revised higher. The minutes are thus likely to exhibit a slightly more hawkish tone compared to the statement, and risks are tilted towards higher Treasury yields in response.
Elsewhere in the calendar, Spanish August industrial production will be released at 9:00 CET, the ECB’s Costa will speak at 10:00 CET and the Fed’s Evans at 14:30 CET.
In addition, the Q3 corporate earnings season will be set in motion today, with e.g. Alcoa due to report, while EU leaders will meet to discuss job creation.
Plenty of supply action
A busy issuance day lies ahead. Germany will re-open its 5-year benchmark for EUR 4bn, while Portugal will sell bonds maturing in 2020 for EUR 0.75 to 1bn. In the US, 10-year notes will be sold for USD 21bn.
Nordea