A mini-bond tantrum this week followed news of easing tensions from Brexit and Italy, reports that China-U.S. trade talks will resume next month, robust U.S. data yesterday on jobs and services and finally suggestions from some European Central Bank policy makers that it’s not yet time for the ECB to start buying bonds again.
The 10-year Treasury yield is now around 1.577%, up from the three-year low of 1.428% plumbed midweek. Ten-year German Bund yields have risen to minus 0.59% and are set for their biggest weekly gain since February 2018.
Thirty-year German yields are on the cusp of turning positive for the first time in a month. Japan’s 10-year government bond yield climbed to minus 0.245% after falling to a three-year low of minus 0.295% this week.
July German industrial production figures, just out, declined for a fifth straight month, by 0.6%. That followed a decline in German industrial orders driven by weak overseas demand.
Yields may rise further if U.S. monthly non-farm payrolls due today increase more than expected (Reuters polls forecast a rise of 158,000 jobs, an unemployment rate unchanged at 3.7% and wage growth of 0.3%).
Better-than-expected numbers could also reignite the dollar, which is already benefiting declining risk aversion, rising to a one-month high against the yen. On other currency markets, the pound was flat but near a six-week peak of $1.2353 as London trade gets underway, pulling further away from Tuesday’s three-year lows. It’s set for its best week since May.
Equity markets have taken heart, too, from the news on the trade. MSCI world stocks are trading just off one-month highs and heading for a second week of gains. Asian shares rose almost everywhere.
A pan-European index is set for a third week of gains. Aside from the U.S. jobs figures, today’s potentially market-moving events include the final euro zone second-quarter gross domestic product, plus detailed information about the GDP components.
Flash estimates earlier showed second-quarter growth at a measly 0.2%; today may show if hitherto robust domestic consumer demand is starting to feel the pain of manufacturing’s recession.
ECB Vice President Luis de Guindos speaks later in the day and markets will be listening for any hints that he agrees with some of his colleagues who have said this week that unleashing more quantitative easing could be premature.
Yields across the euro zone continue to rise and the curve continues to steepen, with the 30-year yield up 3 basis points already this morning. The slightly hawkish ECB policymaker comments come amid similar noises from some other central banks — Sweden said on Thursday a rate increase can still be expected by the end of the year, defying expectations for a dovish tilt.
Australia’s central bank also sounded more upbeat than expected about an economy where growth is the weakest in a decade.
In the UK, opposition leader Jeremy Corbyn will hold a conference call with other opposition party leaders to discuss plans to stop a no-deal Brexit and next Monday’s vote on a general election. We will also hear from Prime Minister Boris Johnson, who is visiting a fish market in Scotland.
European shares are expected to open flat to slightly lower as investors await for the U.S. payrolls report, after a two-day rally that lifted the STOXX 600 index to one-month highs.
The pan-European equity benchmark is up 1.7% so far this week, amid optimism over U.S.-China trade talks and hopes the UK will avoid a no-deal exit from the European Union. Futures on the Euro STOXX 50, DAX and CAC are moving between flat and a fall of 0.1%; FTSE futures are down 0.2% as the pound steadies at five-week highs.
Among possible stock movers is Telefonica, which is expected to rise as much as 2% after El Confidencial reported it may buy back 2% of its capital.
Berkeley is seen rising 1% after the housebuilder said conditions in London were robust and pricing stable in the first four months of its financial year. Ashmore shares are also expected to rise 2% to 3% after its fiscal-year core profit rose 10%.
Other stock movers: Peugeot, Dongfeng agreed to a restructuring plan for their Chinese venture; Dutch telco KPN poached a new chief executive from a Belgian rival; Airbus won 262 gross aircraft orders in January to August; Ericsson's CEO told staff a report of his imminent exit was incorrect.
Emerging-market stocks and currencies were both heading for their best week since mid-June on Friday, with even Argentine stocks up 10% and with Russia expected to cut interest rates for a third time in as many meetings. Argentina stocks up nearly 10% for the week after introduction of capital controls.
— A look at the day ahead from deputy EMEA markets editor Sujata Rao. The views expressed are her own —