Euro Zone Bonds Mixed Ahead of ECB Policy Meeting

Euro Zone Bonds Mixed Ahead of ECB Policy Meeting

1 June 2016, 12:20
Roberto Jacobs

Euro Zone Bonds Mixed Ahead of ECB Policy Meeting

The European bonds mixed on Wednesday as investors await European Central Bank (ECB) monetary policy. The benchmark German 10-year bonds yield, which moves inversely to its price fell 2 basis points to 0.130 percent, French 10-year bunds yield dipped 1-1/2 basis points to 0.471 percent, Irish 10-year bonds yield moved down 2 basis points to 0.757 percent, Italian equivalents inched rose 1 basis points to 1.382 percent, Netherlands 10-year bonds yield tumbled 1 basis points to 0.345 percent, Portuguese 10-year bonds yield up 1 basis point to 3.089 percent, Spanish 10-year bonds yield ticked higher 1 basis point to 1.499 percent and British 10-year bonds yield fell 2 basis points to 1.411 percent by 09:20 GMT.

The European Central Bank is expected to stay on hold at its policy meeting, scheduled on Thursday since certain comprehensive measures that were ruled out in March, are still waiting to be implemented. Against such a backdrop, the Central Bank is most unlikely to act to drop rates any further. Further, the inclusion of corporate bonds to the asset purchase program and the LTROs are likely to occur next month, while the increase in the quantum of the QE program took effect last month, DBS reported. Further, CPI-led inflation in April and May unemployment rate will probably reinforce that inflation will likely remain on the downside with household sector befits recovering from a sharp turn in the jobs market.

In the meantime, Eurozone’s apex bank predicted that May inflation is likely to fall marginally lower by -0.1 percent on year, compared to -0.2 percent in April, with core inflation modestly moving up. April unemployment rate is seen at 10.2 percent, a shade below 10.3 percent month before.

"Brexit risks will also warrant attention after the BoE outlined a cautious approach towards the impending event risk," DBS said in a research report.

Yesterday, the Euro zone preliminary May HICP inflation came out at -0.1 percent y/y, matching consensus expectations, and up slightly from -0.2 percent the previous month. The improvement was driven by increases in food, alcohol, tobacco and non-energy industrial goods. The ex-food-and-energy rate picked up to 0.8 percent y/y from 0.7 percent. Both rates are just 2-month highs.

On the other hand, 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 fell more than 1 percent to below $50 mark after UAE Oil Minister Suhail Mohammed Al Mazrouei said the market will fix itself to a fair price for consumers and producers, adding that the rules of supply and demand are working. The remarks pour cold water on the probability that OPEC will agree to an output freeze to buoy prices. The International benchmark Brent futures fell 1.80 percent to $49.00 and West Texas Intermediate (WTI) dipped 1.24 percent to $48.49 by 09:20 GMT.

Meanwhile, the pan-European STOXX 600 index was down 0.70 percent and the euro-area blue-chip gauge, the STOXX 50 dipped 0.79 percent. The FTSE 100 Index fell 0.59 percent, the DAX trading 0.64 percent lower and the CAC-40 ticked down 0.67 pct by 09:20 GMT.

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