Violent Moves Continue In European Bond Market; Equity Futures Rebound With Oil At Fresh 2015 Highs

This is how DB summarizes what has been the primary feature of capital markets this week - the huge move in European bond yields: "On April 17th, 10-year Bunds traded below 0.05% intra-day. Two and a half weeks later and yesterday saw bunds close around 1000% higher than those yield lows at 0.516% after rising +6.2bps on the day. This is the highest level since January 21st. To be fair Bunds were the outperformer in Europe yesterday with Italian, Spanish, Portuguese 10 year yields +27.2bps, +27.7bps and +29.8bps higher. These are now +49bps, +49bps and +63bps higher than when QE started."

Right out of the European open today, the government bond selloff accelerated with the 10Y Bund reaching as wide as 0.595% with the periphery following closely behind when at 9:30am CET sharp, just as the selloff seemed to be getting out of control, it reversed and out of nowhere and a furious buying wave pushed the Bund and most peripheral bonds unchanged or tighter on the day! Strange, to say the least. Also, illiquid.

The bund selloff has kept pressure on the EUR, which rose as high as 1.127 before also retracting some of the gains. As for the driver - according to many the latest catalyst for the "reflation" trade is the surge in oil, which is now 50% from its 2015 lows, mostly on the back of hopes that this time Chinese easing will translate into greater demand for crude. This coupled with the first API drawdown since mid-January has sent WTI surging again, and at last check it was just shy of $62, while Brent is rapidly approaching the "unambiguously bad" (right Larry Kudlow?) $70 barrier.

So as US traders walk into the work today, Bunds trade marginally in the red following their recent trend by extending losses early in the European session and seeing the German 10yr yield at one point reach YTD highs, with prices falling almost 500 ticks since last week, however the German benchmark pared most of the morning’s losses later in the session with some desks suggesting Bunds were oversold. Analysts at BNP Paribas suggest the sell-off is not over yet and Bunds could continue to fall on each piece data that beats expectations. On the data front, Eurozone service and composite PMI figures with the exception of Germany have exceeded expectations and placed further weight on fixed income products. In sympathy with the move lower in Bunds, Gilts were also been dragged lower earlier in the European session with sentiment also dampened by the UK general election, subsequently leading the UK 10yr yield to break above 2% for the first time since December. Finally, for USTs, yields broke above the 200 DMA at 2.189%, however failing to hold above the handle.

Despite a relatively muted start to the session for equities, stocks have been lifted by the slew of Eurozone PMI data (54.1 vs. Exp. 53.7, Prev. 53.7), with the DAX modestly outperforming after being supported by Allianz following their pre-market trade update.

One thing to watch out for will be any source comments regarding potential haircuts for Greek collateral to obtain ELA funding, which is a topic of discussion at today’s ECB non-monetary policy meeting. Ahead of which, analysts at Goldman Sachs note collateral has been more than ample so ECB could tighten the ELA an increase discounts, adding that Greek banks have become big users of the ELA over 2015 with nearly 20% of bank assets used for the ELA compared to zero in December. Speaking of Greece, earlier today it was reported that the country had successful made its €200 million interest payment to the IMF. Many more to follow.

Asian stocks ended in the red as participants observed caution following yesterday’s global equity sell-off. Both the Hang Seng (-0.41%) and Shanghai Comp (+1.62%) spent most of the day on the front foot before falling into negative territory prior to the close, after yesterday saw the latter post its biggest 1-day drop since Jan 19th. The selloff comes despite Xinhua, China's official press agency, downplaying yesterday's liquidity and margin trading clamp-down worries, referring to the declines as temp adjustments. The ASX 200 (-2.31%) was the session’s laggard weighed on by financials, after lacklustre earnings from Commonwealth Bank (-5.85%), the index’s 2nd largest listing. Of note, Japanese Stock markets were closed for Greenery Day.

In FX, GBP was earlier provided some reprieve by the latest UK services PMI (59.5 vs. Exp. 58.5) after recent downward pressure as a result of political uncertainty ahead of the UK general election. NZD continues to reside at its lows in the wake of the NZ employment report which showed signs of weak wage inflation growth and subsequently triggered expectations of a potential RBNZ rate cut. Elsewhere, the USD continues to face selling pressure after continuing yesterday’s move to break below its 100 DMA at 95.08.

Elsewhere, Fed's Kocherlakota (Non-Voter, Dove) repeated his April 14th remarks by saying that the Fed should hold off raising rates until at least next year. Kocherlakota added the US could see a contraction in GDP due to trade estimates. Whilst later today Fed’s Yellen (Voter, Dove), George (Non-Voter, Soft Hawk) and Lockhart (Voter, Dove) are all scheduled to speak.

WTI and Brent crude futures continue to be supported by the latest API data which showed the first drawdown in stockpiles since Jan 6th (-1.5mln vs. a prev. build 4.2mln), while stockpiles at Cushing fell by 336k bbls. Prices were also further supported by a weaker USD ahead of today’s DOE crude report. In metals markets, both spot gold and spot silver trade relatively unchanged with metals specific news flow relatively light.

In summary: European shares rise slightly as govt bonds continue their slide, with bund yields rising for seventh day to
2015 high. Dollar falls vs euro while crude oil gains for second day. Gold falls for first day in three. Asian stocks fall, with Hang Seng declining for fifth day. U.S. equity index futures rise after S&P 500 yesterday declined most this month. U.S. mortgage applications, ADP employment change, nonfarm productivity, unit labor costs, mortgage delinquencies, mortgage foreclosures among data due later.

Market Wrap

  • S&P 500 futures up 0.3% to 2089.5
  • Stoxx 600 little changed to 391
  • US 10Yr yield up 2bps to 2.2%
  • German 10Yr yield up 3bps to 0.55%
  • MSCI Asia Pacific down 0.5% to 152.1
  • Gold spot down 0.1% to $1192/oz
  • 54.8% of Stoxx 600 members gain, 43.2% decline
  • Eurostoxx 50 +0.7%, FTSE 100 +0.5%, CAC 40 +0.4%, DAX +0.7%, IBEX +0.6%, FTSEMIB +0.8%, SMI -0.8%
  • Asian stocks fall with the Jakarta Composite outperforming and the ASX underperforming.
  • MSCI Asia Pacific down 0.5% to 152.1; Nikkei 225 closed, Hang Seng down 0.4%, Kospi down 1.3%, Shanghai Composite down 1.6%, ASX down 2.3%, Sensex down 2.2%
  • Western Union Said to Be in Early Talks to Buy MoneyGram
  • TPG Telecom Lifts Bid for iiNet to A$1.6, Displaces M2 Offer
  • Blackstone Said to Sell U.S. Apartments for About $650m
  • GIC Said to Seek Up to $980m Stake in Brazil’s Rede D’Or
  • Alfa, Harbour Energy Bid $1.7b for Pacific Rubiales
  • MoneyGram Said to Have Hired Advisers as It Weighs Sale: FT
  • Euro up 0.44% to $1.1234
  • Dollar Index down 0.26% to 94.83
  • Italian 10Yr yield up 2bps to 1.82%
  • Spanish 10Yr yield up 3bps to 1.81%
  • French 10Yr yield up 3bps to 0.85%
  • S&P GSCI Index up 0.8% to 454
  • Brent Futures up 1.4% to $68.5/bbl, WTI Futures up 1.8% to $61.5/bbl
  • LME 3m Copper down 1% to $6418/MT
  • LME 3m Nickel down 0.1% to $14280/MT
  • Wheat futures up 0.6% to 469.5 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg:

  • Bunds trade marginally in the red heading into the North American crossover after yields earlier reached YTD highs, with prices falling almost 500 ticks since last week.
  • Despite a relatively muted start to the session for equities, stocks have been lifted by the slew of Eurozone PMI data.
  • Looking ahead, US ADP Employment Change is due at 1315BST/0715EDT, comments are expected from a host of Fed speakers and source comments may filter out regarding potential haircuts for Greek collateral to obtain ELA funding.
  • Treasuries steady overnight, 10Y and 30Y yields hold above 200-DMAs at multi-month highs; 10Y bunds stabilize, yield 0.527% after touching record low 0.049% in mid- April.
  • Recent selloff is “potentially dangerous” since move is likely a position-driven action led by Europe rather than a U.S.-led selloff based on good economic data, RBC says
  • ECB officials will debate tighter rules for the liquidity that Greek lenders rely on for survival, two people familiar with the matter said, a move that underscores the fragility of the country’s financial system
  • Greece has made a EU200m payment to IMF, CNBC says, citing Reuters
  • Greece’s unemployment rate in Feb. dropped to 25.4% from a revised 25.6% in the previous month, according to e-mailed statement from the Athens-based Hellenic Statistical Authority
  • U.K. party leaders are staking their final claims for power at rallies across the country before Thursday’s election with polls still showing no clear winner
  • As Microsoft mulls whether to launch a bid for, it will have to weigh the benefits of a big expansion in cloud computing against the drawbacks of a high price and a costly, time-consuming integration
  • The Senate will take up legislation to give Obama the trade negotiating authority he wants “very soon,” Senate Majority Leader Mitch McConnell said
  • Sovereign bond yields higher.  Asian stocks fall, European stocks, U.S. equity-index futures rise. Crude oil higher, copper and gold lower

US Event Calendar   

  • 7:00am: MBA Mortgage Applications, May 1 (prior -2.3%)
  • 8:15am: ADP Employment Change, April, est. 200k (prior 189k)
  • 8:30am: Nonfarm Productivity, 1Q P, est. -1.9%  (prior -2.2%); Unit Labor Costs, 1Q P, est. 4.5% (prior 4.1%)
  • 10:00am: Mortgage Foreclosures, 1Q (prior 2.27%); Mortgage Delinquencies, 1Q (prior 5.68%)

Central Banks

  • 9:15am: Fed’s Yellen speaks in Washington
  • 1:15pm: Fed’s George speaks in Washington
  • 1:30pm: Fed’s Lockhart speaks in Baton Rouge, La.

DB' Jim Reid concludes the overnight summary

On April 17th, 10-year Bunds traded below 0.05% intra-day. Two and a half weeks later and yesterday saw bunds close around 1000% higher than those yield lows at 0.516% after rising +6.2bps on the day. This is the highest level since January 21st. To be fair Bunds were the outperformer in Europe yesterday with Italian, Spanish, Portuguese 10 year yields +27.2bps, +27.7bps and +29.8bps higher. These are now +49bps, +49bps and +63bps higher than when QE started. The core sell-off seems to be part of a steady re-pricing of inflation risk and it was noticeable that Oil hit five-month highs yesterday as Brent closed +1.61% at $67.52/bbl and WTI ended +2.49% at $60.40/bbl. The stronger US non-manufacturing ISM (57.8 vs. 56.2 expected) added to the sell-off but it was already well advanced by then. For the peripherals a lack of positive follow through in Greece encouraged the sell-off as comments from Greek finance minister Varoufakis tempered some hopes that an agreement would be in place by the Eurogroup meeting on May 11th. Specifically, Varoufakis said that the May 11th meeting will likely be ‘another step in the direction of the final agreement’, suggesting that the tone has somewhat changed from a deal being imminent (as had been the case with various headlines last week) to a deal happening soon. This change somewhat confirms our view that Greece and its creditors are still clearly not fully aligned in views which in turn keeps the pressure on Athens with a referendum a very real possibility in the event of ‘failed’ agreement. Greek 10y yields led the sell-off in bonds yesterday, closing +63bps wider.

It’s ironic that 2-3 weeks ago markets were discussing how QE might end early. However the very fact that peripherals have behaved as they have done in recent weeks should ensure QE's longevity so the bid should remain consistent for Euro government bonds. The ECB’s Jazbec supported this yesterday after saying that the policy measures seem to be working so far and that it’s too early to talk about how the ECB will act when the mandate is reached.

Yesterday’s US trade balance print for March also generated plenty of headlines as the $51.4bn deficit came in well above the $41.7bn expected, as well as rising significantly from $35.4bn in February to make it the largest deficit since October 2008. Our colleagues in the US noted that two factors appeared to weigh on the number; the impact of the West Coast port dispute and also the clear influence of the stronger Dollar. Crucially however, the rise in the deficit means that they expect Q1 GDP to now be revised down 70bps to -0.5%. After market close, the Fed’s Kocherlakota reiterated the above saying that Q1 GDP will likely be revised negative, while the ‘softening’ of the US economy in the first quarter ‘is a matter for concern’ and underlines his view that rates should be left on hold for the remainder of the year.

With the revision, YoY nominal GDP should migrate down to a low 3-handle for Q1. We always see the Fed's dual mandate very roughly benchmarked by broad Nominal GDP trends as this includes both growth and inflation. Interestingly there have been 118 Fed rate hikes since 1948. In the quarter of the hike the average YoY nominal GDP has been 8.63%. Only twice out of these 118 hikes have rates been raised in a quarter when the YoY rate was below 4.5%. The first was in September (Q3) 1958 when the actual QoQ annualised NGDP was 12.3% and the only reason the YoY had fallen so far was because of a sharp recession in Q4 1957 and Q1 1958 creating a base impact. The other occasion was in September 1982 where the Fed was coming to the end of a period of squeezing inflation out of the system. This hike was actually reversed a month later and should be seen in the context of 9 rate cuts between June 1981 and December 1982 where the Fed Funds rate fell overall from 20% to 8.5%.

So both these occurrences were fairly exceptional. All remaining 116 rate hikes over the sample period saw NGDP 4.5% or higher at the time with 112 occurring with NGDP above 5.5%. Since the recovery started mid-way through 2010, US NGDP has averaged 3.9% with all 20 quarters somewhere between 3.3% and 4.7%. We were at 3.9% in Q1 before any revisions (like from yesterday's trade data) and it seems we'll test the bottom of the post crisis range with them. Clearly NGDP could spike up between Q2-Q4 but it would take a lot to see it above 4.5% and we still worry that a Fed rate hike could be a policy error with NGDP so low. There is no template in history for assessing the likely consequences of raising rates when growth is this low, asset prices are generally this high and with debt still so large. To be safe we'd like to see NGDP consistently get to at least a 5-handle before rates rise.

Treasuries were certainly not immune to the sell-off in bonds yesterday as the 10y benchmark closed +4.1bps wider at 2.185% and crept closer to the YTD highs seen in early March (2.241%). It wasn’t a great day to be long equities either yesterday as the S&P 500 (-1.18%) and Dow (-0.79%) traded lower over the course of the session. Other US data releases yesterday were a little disappointing. The final April services PMI (57.4 from 57.8) and composite PMI (57.0 from 57.4) were both revised down, while the May IBD/TIPP economic optimism print (49.7 vs. 50.0 expected) disappointed. The Dollar snapped two previous successive days of gains as the DXY ended 0.42% lower.

However we did see the strong ISM non-manufacturing print mentioned earlier. With one eye on payrolls on Friday as well as the ADP employment change reading today as a prelude, the employment index component rose a tad to 56.7 (from 56.6 in March) and the highest level in six months – also well above the 6-month average of 55.6. Along with the strong employment index component from the manufacturing ISM, with the readings seen as a leading indicator, the data will likely provide some optimism ahead of Friday’s payrolls but expect a lot of attention on today’s ADP report in the meantime.

Away from the big moves in bond markets in Europe yesterday, European equities took a steep leg lower as the Stoxx 600 (-1.46%), DAX (-2.51%), CAC (-2.12%), IBEX (-2.74%) and FTSE MIB (-2.76%) all reversed earlier gains as the US session kicked into gear while in credit Crossover closed 12bps wider. Yesterday’s moves in fact saw most equity markets wipe out their QE gains so far. Since the QE program started on March 9th, the Stoxx 600, DAX and CAC are now -0.80%, -1.94% and +0.20% respectively while peripheral bourses have also given up most of their gains (IBEX +0.21%, FTSE MIB +0.62%).

Yesterday’s weakness in risk assets came despite upgraded European Commission economic forecasts. The Commission raised its growth forecast for the Euro area to 1.5% for this year from 1.3% back in the February report. 2016 growth was left unchanged at 1.9%. There was a higher forecast for inflation as both 2015 (+0.1%) and 2016 (+1.5%) CPI was upgraded 20bps each. It was a less rosy picture for Greece however as the Commission slashed the country’s growth forecast for this year to +0.5% from +2.5% previously.

Looking at our screens this morning, after the further sell-off in China equities yesterday after we went to print, the CSI 300 (+1.99%) and Shanghai Comp (+1.35%) have rebounded in early trading and seemingly put aside some of the worries after reports that two securities firms (Haitong and Tebon) had raised the requirement for margin financing. Elsewhere, the Hang Seng (+0.91%) is trading higher while the Kospi (-1.66%) and ASX (-1.63%) are lower – the latter falling despite the RBA’s rate cut yesterday. Bond markets have continued the theme from the European session yesterday. 10y yields in Australia (+15.2bps), South Korea (+5.1bps), Singapore (+3.8bps), and Indonesia (+3.7bps) have all widened. Credit markets are around a basis point wider meanwhile.

Back to Greece briefly, as well the comments from Varoufakis yesterday, there were also some suggestions that Athens is pointing fingers at indifferences between its creditors the IMF and European Commission. Various wires noted a Greek government official as saying that ‘serious disagreements between the IMF and EU’ were causing issues and that both creditors had set contradictory ‘red lines’ with the IMF refusing to compromise on labour deregulation and pensions reforms while the EC is continuing to insist that fiscal targets are met.

Turning over to the day ahead now, it’s a busy day in the European timezone this morning as we get the final April services and composite PMI readings for the Euro-area and also regionally in Germany, France and also the UK. Retail sales for the Euro area will also be closely watched. As well as the ADP employment change print which will likely be this afternoon’s highlight, we also get Q1 nonfarm productivity and unit labour costs. Fedpseak will be closely watched today, with the Fed’s Yellen and IMF’s Lagarde due to speak in a panel discussion. Elsewhere, George and Lockhart are also due to speak.