Eurozone Bonds Gain As Brexit Risk Looms Closer, Hefty ECB Stimulus

Eurozone Bonds Gain As Brexit Risk Looms Closer, Hefty ECB Stimulus

9 June 2016, 13:45
Roberto Jacobs
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Eurozone Bonds Gain As Brexit Risk Looms Closer, Hefty ECB Stimulus

The Eurozone government bonds strengthened on Thursday, helped by the European Central Bank’s aggressive bond buying and negative rates, as well as a cautious tone from the US Federal Reserve. Also, rising political risks in Europe shifted investors towards safe-haven assets.

Also, investors preferred to buy safe-haven assets after China’s weak CPI data portrayed that the world’s second-largest economy continues to battle weak demand. On the contrary, crude oil prices scaled beyond the $51 mark in the Asian session, which limited the fall in bund yields.

The benchmark German 10-year bonds yield, which moves inversely to its price fell more than 1 basis point to 0.047 percent, French 10-year bunds yield dipped 2 basis point to 0.402 percent, Irish 10-year bonds yield moved down 3 basis points to 0.750 percent, Italian equivalents inched lower 3 basis points to 1.290 percent, Netherlands 10-year bonds yield down 2 basis point at 0.260 percent, Portuguese 10-year bonds yield tumbled 2-1/2 basis points to 3.065 percent, Spanish 10-year bonds yield slid 3-1/2 basis points to 1.405 percent and British 10-year bonds yield ticked down 1 basis point to 1.243 percent by 09:45 GMT.

In the early Asian session today, the 10-year US Treasury yield dipped below the 1.70 percent, down 3 basis points for the first time since February, the 10-year German yield has also dropped to yesterday's intraday record low of about 0.035 percent. Also, the 10-year UK Gilt yield has slipped to 1.22 percent, about half a basis point below its previous all-time intraday low in February.

Moreover, ECB President Mario Draghi said that a committed central bank can always fulfil its mandate, but if other policies are not aligned with monetary policy, inflation may return to its objective at a slower pace

"The ECB is clearly once again calling for governmental action on supportive fiscal policies and pro-growth structural reforms, but this will tend to fall on deaf ears in European capitals," said an analyst with AB.

The Chinese consumer price index (CPI) weakened unexpectedly in May, while factory gate prices fell for the 51st consecutive months. The consumer prices rose by 2.0 percent y/y in May, less than estimates for 2.2 percent y/y. Moreover, PPI fell by 2.8 percent y/y in May, less than estimates for -3.2 percent y/y and purchasing prices were down 3.8 percent y/y in May, as compared to -4.4 percent y/y in April.

According to Reuters, The European Central Bank started buying corporate bonds, picking up utility, insurance and telecom papers, as part of its latest effort to get companies to borrow and spend, reviving rock-bottom inflation.

Uncertainty about the outcome of the referendum and its implications for the euro zone are boosting demand for German bonds - deemed one of the safest assets in the world. In addition, Spain votes on June 26th in a re-run of an inconclusive December election. And last weekend, the anti-establishment 5-Star Movement made headway in local elections in Italy - piling pressure on Prime Minister Matteo Renzi.

In addition, the recent polls showed the outcome of the referendum is too close to call, raising the possibility that Britain might leave the EU after 43 years of membership in the bloc. A new UK-EU poll by ORB for the Telegraph, among people saying they will definitely vote in the referendum on the 23rd, 48 percent said they will vote to remain and 47 percent to leave the union. Yesterday, the WTO director general Azevedo said that the UK business competitiveness will be badly hit if the country votes to leave the EU. He adds that although trade will continue, it could be on worse/costlier terms.

On Tuesday, the Eurozone Q1 2016 GDP (final) rose 0.6 percent q/q, higher than the market consensus of 0.5 percent q/q, from 0.6 percent in the last quarter of 2015. Spending was the main driver of GDP in the first quarter with both household and private investment leading the way. Household consumption rose 0.6 percent q/q, against market consensus of 0.5 percent q/q, from prior 0.2 percent and Government spending jumped 0.4 percent (expectations was for 0.4 percent q/q), as compared to previous 0.6 percent. Moreover, Exports climbed 0.4 percent q/q, against 0.7 percent in Q4 of 2015. Similarly, Imports rose 0.7 percent, lower than previous of 1.4 percent q/q in the last quarter of 2015.

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 jumped beyond $51 mark as strong China imports aided positive trading sentiment amid the ongoing supply outages in Nigeria and falling U.S. crude oil inventories. The International benchmark Brent futures fell 0.27 percent to $52.37 and West Texas Intermediate (WTI) jumped 0.08 percent to $51.27 by 07:55 GMT.

Looking ahead, Bank of Japan Governor Haruhiko Kuroda will make a decision on stimulus on June 16 and the Federal Open Market Committee (FOMC) gathering scheduled for June 14-15. The U.K. decision on whether to remain in the European Union on June 23 is also weighing on investors’ minds.

Meanwhile, the pan-European STOXX 600 index was down 0.95 percent and the euro-area blue-chip gauge, the STOXX 50 dipped 0.88 percent. The FTSE 100 Index tumbled 0.91 percent, the DAX trading 1.25 percent lower and the CAC-40 fell 0.93 percent by 09:55 GMT.

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