Expect continued divergence between US and German bonds

Fundamental View

Since Monday the ECB has created almost €10bn in asset purchases, €3.3bn a day, €2.3million a minute, over €38,000 a second.....€38,000......€38,000.....€38,000 and so on. It is not surprising therefore we saw both European bonds and European stock indices make new record highs yesterday. The scale of this programme becomes clear when you think that at €10bn then ECB are only 1/6 through this months asset purchase programme. However, as you would expect with the ECB whenever definitive action is taken, there is already chatter now that the central bank may have to end the programme early given the distortions in asset prices that are being created. Although due to credibility concerns it is very unlikely the communicated plan will be adjusted in the near future.

Today’s View

The two core themes will continue to dominate today’s market activity; USD strength and ECB easing. Starting with USD strength we expect to see gold and oil to continue to remain under pressure today with a close inverse correlation to that of the USD. We do however advise caution on T-Note shorts on the USD strength play as US bonds may stay supported in sympathy with their EU counterparts. EU bonds will remain supported on the second dominant theme, ECB easing. We expect the bund to make new all time highs again today as the central bank continues it’s programme of asset purchases, €38,000....€38,000...On the data front we have already had a raft of EU data including CPI’s which came out relatively in- line. ECB’s Coeure and Weidman have also spoken with no new significant news regarding the bond buying programme, we still have Noyer to look forward to at 14:30. Out of the US we expect a beat for both US Retail Sales and Initial Jobless claims this afternoon.