The relief coming after the ECB stress tests proved very short-lived, as a weak German Ifo reminded that the remaining problems were large. German yields opened higher, but quickly started falling and ended the day lower. The German 10-year yield descended by 2bp, while the drop in the US 10-year yield was around 1bp.
Italian bonds expectedly felt pressure yesterday, and the 10-year spread vs Germany widened by around 6bp, while the corresponding Spanish spread contracted by around a bp. Portuguese and Greek bonds took a small beating as well. The Italian underperformance vs Spain is likely to continue today.
Core bonds are set to remain supported today, with yields having some more downside left.
European equities opened with gains, but quickly gave those away, and the Stoxx 600 ended the day with a loss of 0.66%. Banks took a beating by 1.7%, while Italian and Greek markets also recorded more sizable losses. US equities fared slightly better, but also the S&P 500 lost 0.15%. Asian markets are trading mixed this morning, while European markets are set to open slightly higher.
More bad news from Germany
The German Ifo index failed to follow last week’s rebound in the composite output PMI. Both the current assessment and the expectations index fell and clearly more than expected. The expectations index is now at its weakest level since late 2012 and will certainly increase talks of another German recession, even though the correlation with the German GDP has been far from perfect.
On a slightly more positive note, the contraction in loans to the private sector (adjusted for sales and securitisation) slowed from 0.9% y/y in August to 0.6% in the Euro area in September. Loans to households rose by 0.6% y/y, while the pace of falls in loans to non-financial companies retreated from 2.0% y/y to 1.8%. Overall, the lending environment remains weak, and no quick pick-up is in sight.
France and Italy playing tricks on the Commission
Both France and Italy have suggested changes to their 2015 budget proposals that were originally in clear breach of what had been agreed with the European Commission. Especially France took a defiant stance earlier. Both countries propose meeting the Commission roughly half way on its demands, while the new measures are far from ambitious.
The French savings, totalling around EUR 3.5bn, come from lower interest rate costs on government debt, a smaller contribution to EU budgets and enhanced efforts to fight tax evasion. Really? And what would these savings have been used to otherwise?
In the Italian case, the new savings will mainly come from a reserve initially left for tax cuts.
ECB’s covered bond purchases with a brisk start
The ECB announced its initial covered bond purchases amounted to EUR 1.7bn, which is a rather large amount. While it is too early to say that much about the future of the programme, as the purchases have so far only targeted secondary markets, such interventions should continue to contribute to spread narrowing in covered bond markets.
Some lighter US data before more action
Today’s data calendar is far from empty, but the more interesting data and events will have to wait until later in the week. US September durable goods orders will be released at 13:30 CET, August house prices by S&P / Case-Shiller indices at 14:00 CET and Conference Board consumer confidence at 15:00 CET.
In addition, the Swedish Riksbank is expected to cut rates at 9:30 CET, while the Italian economic sentiment indicator will be released at 10:00 CET.
Italian and US supply
Supply action will be in store from Italy and the US. Italy will offer 2-year zero-coupon bonds for EUR 2 to 2.5bn and inflation-linkers maturing in 2024 and 2026 for EUR 0.5 to 1bn each. In the US, USD 29bn of 2-year notes will be offered.
Nordea