When I wrote about near-term yield targets for German and US yields on Tuesday, I certainly did not expect those targets to be hit the following day. The US 10-year yield was trading as low as 1.86% yesterday, down an incredible 34bp compared to the day before. The subsequent rebound was almost as astonishing, with the yield ending the day at 2.14%, still down 6bp for the day. The market pricing of the first Fed rate hike has been pushed into late 2015.
The German 10-year yield plunged to a new record low of 0.72%, but then rebounded to end at 0.76%, still 8bp down for the day. The German curve bull-flattened further, while in the US it was the 5-year sector that ended with the largest falls.
Intra-Euro-area spreads exploded as well, led by Greece. Greek yields touched 8% already, at one point trading 100bp higher for the day. Italian 10-year spreads to Germany jumped by more than 20bp, while Spanish bonds performed a bit better. In the semi-core, Finnish bonds saw somewhat more pressure compared to Austrian and Dutch bonds.
Equity markets saw massive moves as well. In Europe, the Stoxx 600 plunged by 3.16%, the largest daily loss in almost three years. In the US, S&P 500 was already trading around 3% lower, but then rebounded to end the day down by only 0.81%. Asian equities are mostly trading with losses this morning as well, but outside Japan the moves have not been that large and Chinese markets are actually trading with small gains. US equity futures are trading slightly higher as well and Europe is set to open up.
Yesterday’s market moves took place on the back of huge trading volumes, and certainly illustrate that volatility had not been slaughtered for good. The size of the moves also brings back memories of the depths of the financial crisis.
The subsequent rebound that was seen in both equity markets and bond yields suggests that the worst downside pressure is now behind, which can easily be the case. However, US yields have fallen again overnight in Asian trading (10-year yield currently trading at around 2.08%). Bonds should continue to be supported by weak economic data momentum, geopolitical worries and the still wobbly risk sentiment. The recent headlines that ISIS had made significant gains in Iraq and new Ebola infections will keep the mood shaky for now, which is supportive of safe assets.
Now even US data losing momentum
Negative data surprises continued yesterday, this time from the US. The control group of retail sales – the component that filters into GDP – fell by 0.2% m/m vs the expected 0.4% rise (and 0.4% gain in August). Consumption growth in Q3 ended thus being clearly weaker compared to Q2. The New York Fed manufacturing index, in turn, slumped from 27.54 to 6.17, the biggest plunge in almost four years. Especially the New York Fed index is very volatile, and one should not read too much into yesterday’s data releases, but they do add to fears of weaker times ahead for the global economy.
Greece taking a beating
Greek bonds and equities have taken a beating lately on worries that Greece will try to exit its bailout programme early, abandon further reforms and budgetary targets, and have to come to the markets in bigger size. The recent market action clearly implies Greece does not have the credibility or the capability to make it on its own at this point. The Greek political landscape is full of uncertainty as well. A recent poll showed the main opposition left-wing SYRIZA topping the polls with a margin 6.5 percentage points. If the parliament will be unable to elect a president early next year, which seems more likely than not, snap elections would follow.
Draghi refrains from monetary policy comments – pressure on the ECB increases
ECB President Draghi did not make new monetary policy comments is his speech early yesterday, which acted as a further drag on sentiment. Inflation expectations continue to head south. The much-vaunted 5-year inflation expectation five years forwards has fallen to below 1.75%, more than 20bp lower compared to Draghi’s Jackson Hole speech. The ECB seems determined to wait for at least the December TLTRO, before giving new signals about the future, but recent market and data developments certainly add pressure on the ECB to do more even sooner.
US housing market sentiment and Euro-area inflation ahead
Plenty of US data will be released today in the form of weekly jobless claims at 14:30 CET, August capital flow data at 15:00 CET, September industrial production at 15:15 CET, and the NAHB housing market index as well as the Philadelphia Fed manufacturing index at 16:00 CET. In the Euro area, final August inflation numbers should confirm the 0.3% y/y flash estimate at 11:00 CET.
In addition, the ECB’s Coene will speak at 9:15 CET, the Fed’s Plosser at 14:00 CET, Lockhart at 15:00 CET, Kocherlakota at 16:00 CET and Bullard at 18:45 CET.
Spanish and French supply
Today will bring plenty of supply action, as both Spain and France are set to sell bonds. Spain will tap bonds maturing in 2024 and 2028 for a combined EUR 2.5 to 3.5bn. France, in turn, will sell 3-5-year nominal bonds for EUR 6.5 to 7.5bn as well as three inflation-linkers for EUR 1 to 1.5bn.
Nordea