June 3, 2015

Markets Today: Flying Bund Yields

Big moves overnight, not all of them consistent, but they may have caught out investors positioning for a rise in risk aversion. As news of a possible deal between Greece and its creditors came in, bond yields – led by Germany, rose sharply.

Big moves overnight, not all of them consistent, but they may have caught out investors positioning for a rise in risk aversion. As news of a possible deal between Greece and its creditors came in, bond yields – led by Germany, rose sharply. Commodities were buoyed, EUR was bid and risk appetite rose. Just don’t tell equities that. Not all moves were consistent with the same theme, as equity markets, particularly Germany’s DAX, were softer. Perhaps they don’t like the idea of incrementally less accommodative policy. On a daily basis, it is often hard to square the asset class circle.

Admittedly, here were a few different themes. The positive one from Europe: Not only did we hear that the IMF, ECB and Euro group have some sort of agreement (still yet to be agreed upon by Greece), but also that Euro zone CPI was higher than expected. It’s not rocketing away, but perhaps puts the market’s mind to the fact that the ECB may not have to buy bonds forever. We will know more today, post the ECB meeting. But the news was enough to push yields higher, (Germany’s bund selloff is the biggest since August 2012) support the EUR and weigh on equities.

In the US, the news wasn’t so positive. Factory orders, typically a second tier release, were weaker than expected but the underlying results ok. More importantly, in Fed member Brainard’s first speech on monetary policy, she was decidedly dovish. As the Fed’s International expert, she commented on the negative impact of a stronger USD as well as negatives from lower oil prices. She was not convinced that the softness in Q1 was due to temporary factors and decidedly is not in the camp of recent Fed members looking to raise rates this year. We would expect a weaker USD on this, and softer equities; but the big rise in yields here doesn’t necessarily add up.

Cross-currents and positioning can make for some funny moves at times. We would anticipate that if Greece gets a deal in coming days (it’s still if: Greece has yet to agree), and that the US employment data is firmer, then the yield move is the correct response, if somewhat extreme. The USD will get pushed around by a better Europe outlook against a less accommodative Fed. But with better risk appetite, higher commodities and an outperforming AUD might hold.

Helping the AUD substantially outperform (+2.2%!) was the RBA. They kept interest rates unchanged yesterday, with only a slight easing bias in place. They kept the commentary on the AUD unchanged, seeing its fall “likely and necessary.”

Coming Up

The busy week continues, as we heat up towards the blockbuster data at the end of the week. It is likely that markets get a little more concerned and consolidate into the Friday payrolls and Greece news.

Domestically, we get Q1 GDP. NAB raised its estimate for the outcome to 0.7%qoq from 0.6% post yesterday’s better than expected trade contribution to GDP outcome. While growth numbers are backward looking and thus have less of an impact on market’s view of what’s ahead; anything substantially away from expectations will move markets.

There are a whole raft of services PMI’s released. While many economies have a higher contribution to growth from the services sector, these series tend to be less market moving. Who knows, maybe it is due to our ability to conceptualise manufacturing rather than services. No matter, this data has been doing better of late, but doesn’t tend to be strongly market moving. Results are released in: China, Europe, UK, and two versions in the US.

The US ADP measure of employment has lost a lot of credibility, but it can still guide some perception of Friday’s release. It is expected to pick up. The big surprise would be a decline. That remains the biggest risk for payrolls on Friday.

While trade data is a little on the backburner (or was until Brainard’s speech), it is trade data that is causing big swings in US growth, and influencing inflation. The US trade balance doesn’t tend to move the USD, but it remains important for future guidance for the vulnerabilities for the USD. The trade deficit has been relatively consistently worse than expected from the start of 2014.

Finally, we get the ECB. That appears to be somewhat of a sideshow to all the Greece negotiations, but with EUR vulnerable to more (or less) bond buying, there is likely to be a short term focus on what Mr Draghi has to say. Policy is not expected to be changed; forecasts may be revised higher. The risks surrounding Greece, remain key for markets.


On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years +8.30bp to 2.26%. On commodity markets, Brent crude oil +1.16% to $65.63, gold+0.4% to $1,193, iron ore  +1.9% to $63.02. AUD is at 0.7773 and the range was 0.7604 to 0.779. (For more market prices, please see p.2 of the pdf).

  • EZ CPI 0.3%yoyA, 0.2E, 0P; Core 0.9%A, 0.7E, 0.6P
  • US Factory Orders -0.4%A, -0.1E, 2.2P; ex transport 0A, E, P
  • Fed’s Brainard dovish with concerns about falling oil prices and rising USD

For full analysis, download report:

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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