The post-FOMC cross-market moves continued

Rates

Yesterday, the post-FOMC cross-market moves continued. Rates, equities and the dollar all surged. The quite balanced view by the Fed, which contained dovish and a few hawkish elements (wolf in sheep’s clothing?) and was designed to ease global market tensions and oil the shopping season, definitely pleased markets. At the same time, oil and (currencies of) emerging markets recovered, even if oil lost all its intraday gains later on and the rouble stabilized. So, market stress was reduced substantially. In a daily perspective, the US yield curve bear steepened with yield changes varying between +1.4 bps and +9.1 bps. The German curve was partly influenced by US Treasuries, but also by ECB expectations. Till the 5-year, yields were marginally lower to slightly higher. Further out the curve, losses were more outspoken with respectively +2.4 and +4.4 bps for the 10s and 30s. Eco data played no major role. German IFO improved a tad for the second month. US eco data were mixed. There was no majority for PM Samaras’ presidential candidate in the first voting round, but Greek bonds managed to outperform (-18 bps).

The eco calendar is thin today, both in the US and euro zone with only some second-tier national data on the agenda in Europe. EU Leaders continue their two-day Summit in Brussels and Fed’s Evans and Lacker are scheduled to speak at the end/after the European trading. Evans is a dove, Lacker a hawk. Do they give us more insights about the debate at the FOMC earlier this week?

Overnight, most Asian equity markets copy Wall Street gains with China underperforming. However as we’ve seen more of late, there is a lot of volatility in Chinese stocks which shouldn’t surprise following a >25% rise over the past month. The late-session decline in oil price (Brent erased 4% gains and eventually closed below $60/barrel) is for now ignored but that shouldn’t be taken for granted. The US Note future nevertheless trades moderately lower, while the Bund opened little changed.

Today, the eco calendar is empty in EMU and the US. The post-FOMC moves can therefore be extended, putting core bonds under some mild pressure. During US trading, we get the first Fed-speakers with Evans and Lacker. Their comments will be very interesting following the FOMC meeting which contained both hawkish and dovish elements. Overall, Yellen & co made clear that they are still set for a (Summer) 2015 rate hike.

Longer term, the start of the tightening cycle is a negative for US treasuries with underperformance of the front end of the curve (2-5yr). An eventual flaring up of the crash in EM FX/oil/equities would of course abort the risk-on rally and benefit core bonds. At least until the day that the ECB effectively walks the QE talk, we think there is very little upward potential in EMU yields. For intra-EMU bond markets, spread narrowing could eventually continue if indeed the risk-on will continue. Contagion risks (Greek political gamble, higher volatility) cannot be excluded in a longer time perspective and lead to some spread widening (PIIGS) despite an anticipated sovereign QE-programme.