Markets: Fixed Income
On Thursday, government bonds erased part of Wednesday’s huge losses, as the equity rally slowed on concerns about the fate of CIT and its impact on the broader economy. The eco data contained little new info, as the claims were still distorted and the Philly Fed survey painted a less rosy picture compared to the NY Empire State Manufacturing Survey the day before. The earnings from JPMorganChase showed a very strong performance of the trading activities, but underlying rising credit losses indicated that the woes in the banking sector are far from over. These were further highlighted by the survival struggle of CIT, which failed to ensure government backing and will probably have to file for bankruptcy. This weighed on the banking sector and supported the bond markets. A late rally on the US equity markets however drove bonds off their best levels through the close.
In a daily perspective, US yields were moderately lower. The 5-year sector outperformed with a decline of 6 basis points, while 2- and 10-year yields fell by slightly more than 3 basis points. In the euro zone, the curve steepened, as 2-year yields fell by 5.1 basis points compared to a decline by respectively 3.1 and 1.4 basis points in 10- and 30-year yields. Overall, the recent improvement in risk appetite was still reflected in a slight narrowing of the intra-EMU sovereign spreads.
Bonds to keep a close eye on the equity markets
Today, the calendar contains the euro zone trade balance (May), Belgian consumer confidence (July) and the US housing starts and permits (June).
In April, the euro zone trade deficit narrowed for the third consecutive months as imports dropped twice as much as exports. In May, the trade balance is expected to expand into positive territory for the first time since February 2008. Exports are forecasted to have risen in May, while imports might have declined further. Last month, both US housing starts and permits surprised on the upside of expectations after reaching a record low in April. For June, the consensus is looking for a marginal drop in housing starts (530 000 from 532 000), while building permits are forecasted to have risen slightly (523 000 from 518 000). We believe the risks might be on the downside of expectations due to wet weather in June.
The earnings season will also continue with Citigroup, Bank of America and General Electric all reporting Q2 earnings. Especially, the earnings of GE will attract much attention, as there is still some uncertainty about the impact of the financial crisis on its capital business. Until now, most companies (except the telecom sector) have reported better than expected earnings, which resulted in a sharp rebound on the equity markets. Consequently, the S&P moved from the bottom of its tight sideways range at the 875 zone towards the top of the range at the 950 zone. A sustained break on either side may to a large extent decide what action policymakers will take next. In the US, there is currently some discussion going on whether a second stimulus package is needed, while in the euro zone the ECB is under pressure to start purchasing corporate bonds in addition to their covered bond purchases.
Regarding trading, as long as no sustained break has happened on the equity markets, we stick to our view of more range trading on the bond markets. There is still a lot of uncertainty on the economic outlook, which suggests that trading can remain quite volatile over the next weeks. Earlier this week, the downtrend in yields has halted again and yields have corrected upwards. This correction occurred at interesting technical support levels both in the US and in Germany, which does suggest that the longer-term outlook for yields is still upwardly oriented. In the US, 10-year yields rebounded off the neckline of a major longer-term multiple top formation at 3.30%, while in Germany, 10-year yields rebounded off the neckline of a multiple bottom formation at 3.25%. For now, we do expect more range-trading between 3.30% and 4% in the US and 3.25% and 3.75% in Germany.
In the UK, the calendar is empty today.
