The global bond rout that took place last week has reasserted itself this morning, with an unwinding of long positions that has boosted yields on the 10-year German Bund to 0.72% and the yield on the 10-year US Treasury to 2.33%. Recall that in mid-April German yields on 10-year paper were approaching negative figures by trading at just 0.07%, while equivalent US debt was changing hands at 1.85%. The emergence of illiquidity in the global bond market is wreaking havoc in equity markets, with S&P futures off nearly 1% at the time of writing, while the greenback is broadly weaker as price action remains tightly correlated with the domestic bond market. The euro has been a benefactor of higher yields throughout the fixed income space in the eurozone, with EURUSD pushing back into the mid-1.12s, despite the fact that questions around Greece’s solvency continue to hang over the market like a black cloud. Greece was able to cobble together the €750mln payment that was due to the IMF; however, the majority of those funds were from a holding account at the IMF that can be used by countries in emergency situations. In addition, according to reports released overnight, the IMF has stated it does not want to take part in what could potentially be a third bailout for Greece, which if confirmed, would most likely leave the Germans somewhat nervous about continuing to funnel money into what is seemingly a black-hole.
On the economic data front, industrial and manufacturing output in the UK over the month of March both came in better than expected, with m/o/m increases of 0.5% and 0.4% respectively. The upside surprise to the overnight data has helped the pound carry over the positive momentum witnessed post-election, with GBPUSD rallying through its 200-day moving average to trade in the high-1.56s. Since the surprising election results there has been a steady bid tone accompanying the pound, with today’s data providing a fundamental rationale to follow through on that buying interest. At the same time, the result of the last week’s election has shaped expectations that tomorrow’sQuarterly Inflation Report could be presented in a slightly more hawkish light by Governor Mark Carney given the stability of a majority Conservative government. Along with tomorrow’s QIR from the BoE, the market will also digest employment and average earning figures for the UK labour market, and barring a negative downward surprise, there is scope for the GBPUSD to extend its recovery from current levels.
Heading into the North American open, equity futures reside firmly in negative territory ahead of the opening bell, while oil has bounced back on a broadly weaker USD with Texas Tea changing hands around the $60 level. The softness witnessed in the greenback and the flow-through to positive price action for commodities has allowed the loonie to bolster its appeal to market participants, with USDCAD retreating back into the low-1.20s. The disconnect between the physical and financial futures markets for oil is beginning to raise caution as to how long this can hold before supply and demand fundamentals in the physical market must shift in order to justify levels in the financial market, leading us to believe the futures market is frothy at current valuations. Recognizing commodity markets, as well as currency markets, tend to overshoot, make sure to speak with your dealing teams in order to devise a risk management strategy to help protect against continued volatility throughout commodity, bond, and currency markets.
Further reading:
EUR/USD reaches high resistance on USD weakness
UK Manufacturing Production rises 0.4% – GBP/USD jumps nearly 100 pips
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