European Bonds Slump on Profit Booking, Likely to Gain on Weak Risk Appetite

European Bonds Slump on Profit Booking, Likely to Gain on Weak Risk Appetite

4 May 2016, 12:46
Roberto Jacobs

European Bonds Slump on Profit Booking, Likely to Gain on Weak Risk Appetite

The European bonds slumped on Wednesday as investors booked profit after snapping 2-day rally driven by weak crude oil and global growth concern. The benchmark German 10-year bonds yield, which is inversely proportional to bond price rose 4.06 pct to 0.205 pct, French 10-year bunds yield climbed 2.35 pct to 0.571 pct, Italian equivalents jumped 2.08 pct to 1.501 pct, Spanish 10-year bonds yield inched higher 1.84 pct to 1.604 pct and Portuguese 10-year bonds yield rose 1.70 pct to 3.164 pct, Netherlands 10-year bonds yield moved up 1.83 pct to 0.444 pct by 0940 GMT.

Yesterday, the EU Commission in their spring report mentioned that Euro zone GDP growth is expected to be at 1.6 pct in 2016, down from previous forecast of 1.7 pct and to 1.8 pct in 2017, from earlier forecast of 1.9 pct. Having said that Germany 2016 GDP is likely to be around 1.6 pct, against previous anticipation of 1.9 pct and in 2017 GDP to grow 1.6 pct, lower than the previous forecast of 1.9 pct. Similarly, British 2016 GDP is expected to hover around 1.8 pct, from up 2.4 pct in the previous estimation and in 2017 GDP to grow 1.9 pct, from previous consensus of 2.2 pct. Moreover, France 2016 GDP is expected to grow 1.3 pct vs previous forecast of 1.4 pct and also France will miss nominal budget deficit reduction target next year unless it takes action. They further added that Italy's debt won't fall this year after rising last year and breaching EU rules and its structural deficit will rise in 2016 rather than fall. Furthermore, Spain's structural deficit will rise this year as well as next year, breaching EU recommendations and Spain will miss goal of cutting deficit below 3 pct this year and also next year, they noted.

In addition, the European bonds have been closely following developments in oil markets because of their impact on inflation expectations, which are well below the European Central Bank's target. Today, crude oil prices tumbled on concerns that slowing demand and rising Middle East production would extend a global supply overhang. The United States crude inventories rose by 1.3 million barrels in the week to April 29 to 539.7 million barrels, according to data from the American Petroleum Institute, which further weakened the investor sentiments. Also, Iraq said that its oil shipments from southern fields averaged 3.364 million barrels per day in April, up from 3.286 million in March and production from top exporter Saudi Arabia was 10.15 million barrels per day in April. The International benchmark Brent futures fell to $44.97, from yesterdays $45.56 and West Texas Intermediate (WTI) declined to $ 43.72, against yesterdays $44.40.

On the other hand, investors did not react to the weak Euro zone economic data. The March retail sales declined 0.5 pct m/m, against market expectation of 0.1 pct fall, from up 0.5 pct in February. Similarly, Euro zone service PMI declined to 53.1, as compared to 53.2 in March. Moreover, the German April service PMI fell to 54.5, lower than the market expectation of 54.6, from 54.6 in March, hinted that the business activity’s growth rate in Germany slowed slightly.

We foresee that the European bonds are likely to gain on weak economic data and tumbling crude oil. Meanwhile, the pan-European STOXX 600 index was down 0.65 pct and the euro-area blue-chip gauge, the STOXX 50 dipped 0.77 pct. The DAX trading 0.58 pct lower and the CAC-40 slide 0.51 pct by 0940 GMT.

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