Core bonds continued to perform strongly on Friday, curves bull-flattened further, oil prices remained in free fall (front contract of Brent almost touching USD 60 before rebounding some earlier today) while equities took a beating. The low in German 10-year yield now stands at 62bp after a 5bp drop on Friday. The US 10-year yield plunged by an even bigger 8bp to 2.08%, the lowest since mid-October.
Intra-Euro-area bond spreads widened, while market-implied inflation expectations continued to drop.
The momentum in the bond markets certainly remains strong at the moment, and calling the yield bottoms at these levels would be risky. Last year, we saw an overshot towards the upside late in the year, which was subsequently reversed. Might this year see the opposite? US yields have rebounded a bit early today, suggesting yields are trying to find some support at current levels.
Equities recorded sizable losses on both sides of the Atlantic on Friday. The Stoxx 600 slumped by 2.58%, while S&P 500 tumbled 1.62%. Asian markets are trading mostly lower as well this morning, but most prices have rebounded from the intraday lows, offering a mildly positive sign for European markets this morning.
Abe gets another shot at reforms
Japanese government parties have retained their more than two-thirds majority in the lower house of the parliament after snap elections yesterday. Still, the voter turnout slumped to a post-war low of around 52% (from 59% in 2012), indicating Prime Minister Abe’s performance has not been received enthusiastically. Mr Abe has now received another chance to really reform the Japanese economy, and a lot of work is ahead. So far, he has been rather timid as far as the politically more challenging structural reforms are concerned.
French downgrade old news
The rating agency Fitch lowered its French rating by a notch to AA late on Friday, citing significant slippage in the 2015 budget and significantly reduced capacity of public finances to absorb shocks. As the rating had been on a negative watch, while the new rating has a stable outlook and is now at par with the assessment of Standard & Poor’s (though S&P has a negative outlook on its AA rating), the move was no surprise and should not hurt French bonds noticeably. Still, it was the latest reminder for the government that the French economy desperately needs more reforms.
US consumer confidence jumps
Preliminary December University of Michigan consumer confidence numbers showed a surprising jump from 88.8 to 93.8, the best reading since early 2007. Even though the relationship between consumption and confidence is far from perfect, the data is a reminder that the falling oil price has boosted the outlook for US consumption growth, and the momentum of the US economy remains strong, a conclusion one would not make based on the recent market developments.
Big repayment illustrates the slow rise in excess liquidity
Banks will pay a record EUR 39.8bn of the originally 3-year LTROs this week. A fuller picture of liquidity changes after the EUR 130bn TLTRO allocation will be known after this week’s refinancing operations, but the large repayment will further support the picture that excess liquidity will not see a huge jump.
Fed meeting, Euro-area PMIs and Greek presidential elections
This week’s calendar has quite a lot to offer. Fed will face pressure again to revise its forward guidance on Wednesday, while November inflation numbers are set to show a plunge on the same day.
In the Euro area, flash PMIs for December will gather interest tomorrow, while the first round of the Greek presidential elections will take place on Wednesday. The first round of the elections should be a non-event, but there is a risk the vote will lead to increased expectations of early parliamentary elections. Further, another EU Summit will take place on Thursday and Friday.
In China, the main focus will be the HSBC/Markit flash manufacturing PMI tomorrow.
In today’s calendar, the US New York Fed manufacturing index will be out at 14:30 CET, November industrial production at 15:15 CET and the NAHB housing market index at 16:00 CET. In addition, the ECB’s Nowotny will speak at 10:00 CET.
Issuance calendar looking light already
The end of the year is near, and not a lot of issuance activity is left for 2014. Spain will sell bonds maturing in 2019, 2023 and 2024 on Thursday, while the US will offer USD 16bn of 5-year TIPS on the same day.
Coupon and redemption payment flows from EUR government bonds are largely behind for this year, and there are only small such payments in store during the remainder of the year.
Nordea