German bonds rallied in earnest yesterday, with the 10-year yield falling by 5bp and the curve bull-flattening, while the equity markets headed lower again. The fall in yields in the US was much more modest (10-year yield down by around a bp).
Intra-Euro-area spreads widened mostly, with especially Italian and Spanish bonds under pressure. Italy was hurt by the weak economic outlook, as illustrated in the new European Commission forecasts, while Spain was burdened by uncertainty over Catalonia (see more below).
Core yields are set to head higher today on some relief after the US elections produced a clear result (see more below) and more positive US labour market data.
Oil prices fell to fresh 4-year lows after Saudi Arabia announced its prices for December. Lower oil prices are good news for the Euro-area economy, but in the near-term they could easily add to worries of inflation being too low.
European equities took a beating, with the Stoxx 600 down by 1.0%. In the US, S&P 500 was able to limit the losses to 0.28%. Asian markets are trading mixed this morning, and the changes have been rather modest. Europe is set to open clearly higher.
Draghi feeling increasing pressure also from within?
Reuters ran a story yesterday, citing ECB sources, saying the dislike among national central bank chiefs in the Euro area towards Draghi’s leadership style has increased. The story continues that a group of national central bankers plan to challenge Draghi today over what they see as his secretive management style and erratic communication, and urge him to act more collegially. They are seemingly especially angered by Draghi effectively setting a target for the ECB’s balance sheet growth immediate after the Governing Council had explicitly agreed not to make any figure public. The story also suggests at least seven and possibly as many as 10 of the 24 Governing Council members are against government bond purchases, even if inflation fell further.
Disagreements within the ECB are nothing new, and it has been clear that the recent decisions have been far from unanimous – that has still not prevented decisions from being taken. Draghi’s leadership style has no doubt raised objections as well, but he has been able to push difficult decisions through, something that is likely to continue also going forward. That said, it also looks clear that there is major opposition to government bond purchases with the ECB. Such opposition is unlikely to prevent even government bond purchases, if the outlook continues to worsen, but at a minimum, the ECB will want to explore every other alternative first.
Republicans celebrate in the mid-terms – better potential to actually do something
Even though not all the votes have been counted, the Republicans already look set to secure at least 52 of the 100 Senate seats as well as increase their majority in the House. They did well also in several of the gubernatorial races. As a result, the Republicans are set to control both houses of Congress. They would still lack the 60-seat majority in the Senate required to pass most legislation, while Mr Obama retains veto-power. Still, the new setup should lead to better prerequisites in finding compromises and passing at least some of the more modest reforms. The clear result should also be positive for markets in the near term.
Tensions in Spain increase further
The Catalan government vowed to press ahead with its informal and non-binding independence vote on Sunday despite another ruling from the Constitutional Court blocking also the new version of the planned vote. The Catalan question thus continues to increase tensions in Spain, and coming in the aftermath of a poll putting an anti-establishment party in the lead, will increase near-term uncertainty, which should also keep Spanish government bonds under pressure.
Irish debt continues to hold appeal
The new Irish 15-year syndicated EUR benchmark received a warm welcome. The order book for the EUR 3.75bn May 2030 benchmark amounted to more than EUR 8bn, while the issue was priced at 102bp above mid-swaps compared to the initial guidance of around 105bp.
The demand for the new Irish bond was no doubt supported by the clear rebound the Irish economy is currently experiencing. As an illustration, the Commission yesterday lifted its Irish growth forecast from 1.7% to 4.6% for this year and from 3.0% to 3.6% for 2015.
ADP and non-manufacturing ISM index ahead
Today’s ADP employment report at 14:15 CET will offer guidance for Friday’s US employment report, as will the employment component in the non-manufacturing ISM index at 16:00 CET. In Europe, the final Euro-area October services (and composite) PMI will be out at 10:00 CET, the UK services PMI at 10:30 CET and Euro-area September retail sales at 11:00 CET.
In central bank speeches, the Fed’s Kocherlakota will speak at 15:15 CET, Lacker at 15:30 CET and Rosengren at 16:00 CET.
On the issuance front, Germany will re-open its 5-year benchmark for EUR 4bn.
Nordea