To get a sense of why futures are sliding right now, and what every global trader of any asset class is looking at right this moment, look no further than the chart below which shows what is going on with German Bunds yields.
As DB and Reuters conveniently point out, this is the biggest and fastest weekly drop in Bund history.
Bund future -450 ticks this week (-700 in last two weeks), biggest fall since German reunification: pic.twitter.com/jLvcDDeZhy— Jamie McGeever (@ReutersJamie) May 7, 2015
The catalyst for today's plunge was weak French OAT auction, which saw yields rise and bid/cover ratios decline at 2023 and 2025 bond actions. "The big fallout in core fixed income occurred after a very soft French auction with a large tail which collapsed the market again," according ED&F Man head of U.S. rates Tom Di Galoma writes in note. But while there was an immediate cause, what really happened was a continuation of the selling momentum seen in the past two weeks.
Now it is no secret that three weeks ago when the Bund was on the verge of sliding under 0.00%, the ECB wanted nothing more than to have a controlled selloff because at this rate of "frontrunning" Draghi's purchases, the central bank would soon be left with nothing to monetize above its -0.20% deposit rate hard limit.
However, the epic rout it has since gotten following some serious public and private sector jawboning, is precisely the opposite of what the ECB wanted which needed a smooth, controlled descent, and the sheer speed and size of the selloff is why Draghi may have no choice but to step in soon with some verbal intervention and declare that Bund yields, which are now well above where they were when Q€ started, will be pushed lower "whatever it takes."
For now however, this is what is going on:
- BOND SELLOFF DEEPENS; GERMAN 10-YR YIELD JUMPS 17 BPS TO 0.76%
- SPANISH 10-YEAR BOND YIELD CLIMBS TO 2%; HIGHEST SINCE NOV. 24
- ITALIAN 10-YEAR BOND YIELD CLIMBS ABOVE 2%; 1ST TIME THIS YEAR
- 10Y TREASURY YIELD CLIMBS 6BPS TO 2.31%, HIGHEST SINCE DEC. 8
- U.K. 10-YR BOND YIELD CLIMBS 8 BPS TO 2.06%; MOST SINCE NOV. 24
- IRISH 10-YEAR YIELD RISES ABOVE 1.5%, FIRST TIME SINCE NOV. 21
- JAPAN 10Y YIELD UP 7.5 BPS, SET FOR BIGGEST RISE SINCE MAY 2013
- INDIA'S 2024 BOND YIELD CLIMBS 9 BPS TO 7.98%
As a result of the ongoing bond drubbing, European equities have started the session on the backfoot in tandem with the lacklustre Wall St. close in the wake of the disappointing ADP report yesterday which has dampened expectations for Friday’s NFP reading. Furthermore, stocks in the US were also weighed on yesterday by comments from Fed Chair Yellen who said that she viewed the stock markets as ‘generally quite high’. Additionally, Asian equities traded lower across the board overnight with particular undperformance in Chinese equities amid ongoing margin trading crackdowns. Given the recent trend in European yields, which has seen the German 10yr break above 0.75%, higher borrowing costs have also weighed on European companies. Furthermore, European equities have also been subject to a slew of pre-market earnings which have provided some reprieve for the DAX.
In fixed income markets, Bunds have once again continued to ebb lower with the German 10yr yield breaking above its 200DMA seen at 0.635% to break above the 0.75% level. This week has seen the biggest rise in the German 10yr yield since 25yrs with Bund yields currently on track for their largest intra-day rise since mid-2012. This comes amid no new fundamental newsflow and is more of just an extension of the recent trend but the FT highlight that the recent pullback in energy prices could weigh further on fixed income products due to inflation expectations.
Activity in the FX market remains relatively subdued with the exception of GBP which has been subject to selling pressure as voting for the UK general election begins today. In terms of the order of play, exit polls are to be released at 2200BST but these polls may not necessarily provide too much insight given the closely fought nature of the race. Thereafter results will begin to be announced from 2300BST. From a technical perspective, GBP/USD lower as the pair eyes its 100DMA at 1.5146 and 1.5166 of its 61.8% Fibonacci at 1.5066 which is the next touted level of support. Elsewhere, AUD has seen a paring of its overnight gains and slipped back below 0.8000 despite the positive upward revision to the previous for the Australian jobs report.
In the commodity complex, both WTI and Brent crude futures initially saw a pullback of yesterday’s gains which stemmed from the unexpected drawdown in the DoE data. However, since then prices have moved back into positive territory and WTI has reclaimed the USD 61.00bbl level. Gold extended on its declines overnight amid technical selling after breaking below its 50 DMA level of USD 1189.86 which coincided with silver breaching its 100 DMA level of USD 16.56 to the downside.
In Summary: European shares fall with the oil & gas and basic resources sectors underperforming and tech, insurance outperforming. German March factory orders rise less than expected. ECB wants progress from Greece at May 11 meeting or will consider tighter liquidity rules for banks, according to two officals. Norges Bank maintains key rate, says it sees prospects for June rate cut. China’s stocks capped biggest three-day retreat since June 2013. The U.K. and French markets are the worst-performing larger bourses, the Italian the best. The euro is little changed against the dollar. German 10yr bond yields rise; Japanese yields increase. Commodities little changed, with silver, gold underperforming and copper outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, consumer credit, Challenger job cuts, due later.
- S&P 500 futures down 0.6% to 2062
- Stoxx 600 down 1.3% to 383.6
- US 10Yr yield up 3bps to 2.27%
- German 10Yr yield up 14bps to 0.73%
- MSCI Asia Pacific down 1.2% to 150.6
- Gold spot down 0.7% to $1184.1/oz
- All 19 Stoxx 600 sectors fall; tech, insurance outperform, oil & gas, basic resources underperform
- Eurostoxx 50 -1.4%, FTSE 100 -1.6%, CAC 40 -1.5%, DAX -1%, IBEX -1.5%, FTSEMIB -1%, SMI -1.4%
- Asian stocks fall with the Sensex outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific down 1.2% to 150.6; Nikkei 225 down 1.2%, Hang Seng down 1.3%, Kospi down 0.6%, Shanghai Composite down 2.8%, ASX down 0.8%, Sensex down 0.4%
- Euro up 0.04% to $1.1351
- Dollar Index down 0.01% to 94.07
- Italian 10Yr yield up 3bps to 1.95%
- Spanish 10Yr yield up 3bps to 1.93%
- French 10Yr yield up 13bps to 1.03%
- S&P GSCI Index down 0.1% to 450.6
- Brent Futures up 0.1% to $67.8/bbl, WTI Futures down 0.5% to $60.7/bbl
- LME 3m Copper up 0.7% to $6434/MT
- LME 3m Nickel up 0.6% to $14055/MT
- Wheat futures down 0.1% to 479 USd/bu
Bulletin Headline Summary from Ransquawk and Bloomnerg
- Bunds continue to drift lower, weighing on European equities due to higher borrowing costs, although yields have provided some support for EUR
- UK asset classes continue to be weighed on by political uncertainty with voting to begin today for the general election
- Looking ahead, today sees the release of the US weekly jobs data, potential comments from Fed’s Evans with focus also to be placed on the UK general election.
- Treasuries fall for a fifth day led by long end, 10Y yields reach 2.309%, highest since December, 30Y yields break above 3% level, amid rout in EGBs.
- “The big fallout in core fixed income occurred after a very soft French auction with a large tail which collapsed the market again,” ED&F Man head of U.S. rates Tom Di Galoma writes in note
- German bund reaches 0.777%, highest since Dec, touched record low 0.049% on April; Draghi announced ECB QE program Jan. 22
- Britain is voting in the most uncertain election since World War II, a ballot that looks set to be followed by negotiations to secure a parliamentary majority and clashes over who has the legitimacy to govern
- China’s stocks capped their biggest three-day retreat since June 2013 on concern valuations are too high given an increasing supply of shares and prospects for a regulatory clampdown on margin trading
- ECB officials want progress at a meeting of euro-region finance ministers on May 11 or they will consider tightening Greek banks’ access to emergency liquidity they need to stay afloat, said two officials who spoke on condition of anonymity as the talks are private
- Norway’s central bank kept its benchmark interest unchanged for a second meeting and signaled it’s ready to ease again as it assesses the economy’s ability to withstand the slump in oil prices
- Sovereign bond yields surge. Asian, European stocks plunge, U.S. equity-index futures fall. Crude oil and copper higher, gold lower
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, April (prior 6.4%)
- 8:30am: Initial Jobless Claims, May 2, est. 279k (prior 262k)
- Continuing Claims, April 25, est. 2.270m (prior 2.253m)
- 9:45am: Bloomberg Consumer Comfort, May 3 (prior 44.7)
- 3:00pm: Consumer Credit, March, est. $15.8b (prior $15.516b)
DB' s Jim Reid completes the overnight recap
There was no let up in the global bond market sell-off yesterday as 10y Bunds slid a further +7.1bps to 0.584% - the highest level since December 24th and now 27bps higher since the start of QE. To be fair, Bunds actually outperformed once again in Europe as similar maturity yields in France (+8.3bps) and the Netherlands (+8.6bps) moved sharply wider while in the periphery, Italy (+11bps), Spain (+11.6bps) and Portugal (+14.2bps) took their week-to-date moves to +47.9bps, +44.0bps and +45.9bps respectively. Treasuries were also on the receiving end as the 10y benchmark closed +5.8bps wider at 2.243%, matching the YTD highs of early March while the Dollar fell 1%. Comments from the Fed’s Yellen that long-term interest rates are too low along with oil markets extending their recent 5-month highs (Brent +0.37%, WTI +0.88%) and a weak ADP employment print yesterday certainly added some confusion to price action.
Before we take a closer look at the details, there’s similar weakness in bond markets in Asia this morning where 10y bond yields in Australia (+8.2bps), Singapore (+6.1bps), Indonesia (+5.1bps) and Japan (+6.4bps) have all sharply widened. Equity markets are also lower with the Shanghai Comp (-1.41%), Hang Seng (-0.58%), Kospi (-0.97%) and Nikkei (-1.01%) all falling. The latter in particular has dropped despite both the April services (51.3 from 48.4) and composite (50.7 from 49.4) PMI readings rising from March, although markets there are somewhat playing catch up having been closed for public holidays this week. Japan credit markets are around 2.5bps softer this morning.
Back to markets yesterday, there weren’t many asset classes where investors were safe as US equities also declined as the S&P 500 (-0.45%) and Dow (-0.48%) both fell for the second consecutive day while in credit, CDX IG ended 1.5bps wider. This didn’t seem to deter Apple and Shell however as both companies issued $18bn in bonds between them yesterday. In terms of the Yellen comments, the Fed Chair said yesterday that ‘equity market valuations at this point are quite high’ and that ‘long term interest rates are at very low levels’ which, unsurprisingly, means ‘we could see a sharp jump in long term rates’ after liftoff. We also heard from the Fed’s Lockhart yesterday who said that raising rates ‘too early could perhaps snuff out momentum and too late could bring other consequences’ and that ‘I am more prepared to take the risk of waiting’. Lockhart did go on to say that the market view of a September timeframe is ‘reasonable’ while noted that this Friday’s payrolls in particular is ‘a very important one’.
On this topic, yesterday’s April ADP employment change print didn’t help build much optimism after the +169k reading came in well below market expectations of +200k. The print was below a downwardly revised +175k March print and the lowest reading since January last year. Aside from the ADP print, Q1 nonfarm productivity was in line at -1.9% qoq and unit labour costs (+5.0% qoq vs. +4.5% expected) came in above market. So all eye’s on the much anticipated payrolls print tomorrow.
European equity markets were a tad more mixed yesterday as the Stoxx 600 (-0.60%) closed lower while the DAX (+0.20%) and CAC (+0.15%) finished modestly higher. Yesterday’s final April PMI prints were fairly encouraging on the whole. For the Euro area, the final composite reading was revised up 0.4pts to 53.9, supported by an equal move in the services number to 54.1 to leave it just 0.1pts off the March reading. Looking across the various countries, the upward surprise in the composite was supported by decent revisions in Spain (+2.2pts to 59.1) and Italy (+1.5pts to 53.9) with both driven by services gains. On the flip side, a monthly decline was confirmed for Germany (54.1 vs. 55.4 previously) and also France (50.6 vs. 51.5 previously). Notably however, our European Economics colleagues noted that, all-in-all, the final Euro area PMI’s for April confirmed a solid growth picture and that if unchanged for the rest of quarter, would point to growth of +0.4% qoq for Q2 which is line with their current projections. Away from the PMI’s, retail sales for the Euro area (-0.8% mom vs. -0.7% expected) disappointed.
Before we run over today’s calendar, yesterday saw the ECB increase the ELA cap once again for Greek lenders after raising the limit by €2bn. The ECB chose not to make any changes to the haircuts on Greek collateral, instead waiting until Monday to reassess post the Eurogroup meeting. Looking ahead to that meeting, Eurogroup Chair Dijsselbloem was yesterday quoted as playing down any hopes of a resolution after saying that ‘since the last Eurogroup quite a bit of progress has been made’ but that ‘still lots of issues have to be solved, have to be deepened more, with more details, so there will be no agreements on Monday’. The comments echo similar comments from Varoufakis earlier this week that a Monday deal is unlikely which in turn should keep the market on edge for the time being.
Looking at the day ahead, aside from the obvious focus on the UK election we’ve got German factory orders and French industrial and manufacturing production readings to look forward to this morning. The ECB’s Mersch is also due to speak and we also get the Norges Bank rate decision. More employment data is the theme in the US this afternoon with Challenger job cuts and initial jobless claims expected while the March consumer credit print rounds off the releases.