Europe woke up altogether on the wrong side of bed on Monday with investors dumping stocks, commodities and peripheral government bonds as the political and economic climate took a pounding. Yields on core government bonds slid while those on less well-to-do nations rose as did the cost of insuring against the unsavory prospect of default. Global stock markets were ravaged as news unfolded on Monday in part due to prospects of economic weakness while the debt-gridlock across the Eurozone took on greater prominence after the outlook for Italian debt was downgraded and Spanish voters voiced their objections to Socialist policies.
Eurodollar futures – The elevated risk-averse tone is evident across the Eurodollar strip with gains of up to four basis points in the 2013/24 strip. However, nearer maturities are a little softer in price with implied yields higher by a couple of basis points. The yield on two-year government paper fell to less than 0.5% to its lowest point year-to-date while the benchmark 10-year yield challenged last week’s dip to 3.09% although for now the June note future appears as least temporarily to have exhausted its ascent on the chart to a session peak at 123-13.
European bond markets – It’s about one-year on from the depths of the crisis that resulted in a financial bailout of €110 billion for Athens. Twelve months on investors looking over their shoulders must be wondering what has been achieved. Greece has been followed by Portugal and Ireland in requesting a hand-out and still yields are rising on account of the prospects of little growth at the edge of the Eurozone. And now rubbing salt in to the wound is the prospect of a cooling in activity in the German heartland according to a PMI manufacturing report released Monday. S&P said Friday that the reality of Italy reducing its deficit was slim causing it to put the nation on watch for a downgrade. Spanish voters swimming in 20%-plus unemployment spared no tears for Prime Minister Zapatero at weekend elections across the nation and inflicted the worst defeat for the ruling Socialists in 30-years. German bunds caught a bid sending the yield on the 10-year paper down by four basis points to 3.01% while short-term implied yields fell by up to seven basis points as investors determined lesser prospects that the ECB would pursue anti-inflationary monetary tightening in a climate of sliding confidence.
British gilts – British yields gapped lower in line with gains in core-European bond prices. Bank of England Chief Economist Spencer Dale told the Financial Times over the weekend that his main concern is for the nasty path inflation appears to be taken, more so than being concerned that the recovery hasn’t gained traction. Yet in today’s market few seem to heed his call for tighter monetary policy as investors buy short-sterling futures causing a nine basis point decline in implied yields. June gilts had pared gains to 121.23 from an opening advance to 123.47 and appear to be setting up for a test of the session low at 121.16 beneath which an opening gap must at some point come under the microscope down to 120.92.
Canadian bills – Markets closed for Queen Victoria Day.
Japanese bonds – Japanese government bond futures expiring in June rose by 10 ticks to settle at 140.92 although some fear that the wind beneath the wings is fading. With a key 20-year issue due for auction this week dealers sold cash bonds despite the 1.5% slide in the value of the Nikkei as risk aversion reared its head.
Australian bills – The weekend’s election results building in Spain helped bow Pacific and Asian stock markets while the real buckling came after news broker out of China that the manufacturing sector was suffering under the weight of government measures to cool the economy. An HSBC manufacturing PMI showed the sector slowed to an index reading of 51.1 from April’s 51.8. That’s hardly comforting for miners and manufacturers in Australia who view China as its biggest customer. In the face of mounting global risk aversion government bond prices advanced lopping six pips off the benchmark 10-year yield, which slumped to 5.25% or 50 pips over where the Reserve Bank maintains its short-term benchmark at present. Dealers reduced bets that the central bank would need to raise interest rates again and drove down implied yields by seven pips.