The back-up in global bond yields going into the two big central bank meetings over the coming week may be modest so far, but it bears watching.
The latest twist came on Monday, as still sub-zero German 10-year bund yields climbed to their highest in a month, after a Reuters story on how Germany was considering using independent public entities to boost spending. Those entities would take on new debt for climate and infrastructure projects not accounted for in the federal budget.
The move speaks to growing pressure on governments to step up spending to support growth, since central bank policy in many countries is considered maxed out.
The European Central Bank is widely expected to cut interest rates and point to further bond buying stimulus on Thursday, but a growing chorus of opinion says that it and other central banks with negative interest rates and long-term sovereign bond yields have reached the limits of stimulus policies. Bank of England policymaker Gertjan Vlieghe said on Monday the BoE had effectively reached that point despite Brexit uncertainties.
The firming of bond yields, which saw 30-year German yields briefly turn positive on Tuesday for the first time in a month, also comes as incoming economic numbers have stopped disappointing in many countries, suggesting markets are better priced for the prevailing macro climate.
Citi’s economic surprise indices for the United States has turned positive over the past week for the first time since February, while the UK equivalent turned positive for the first time since June.
The G10 aggregate index is on the cusp of flipping into the black, too, and is at its highest in a year. There is also some trepidation markets may have overly priced aggressive new stimulus by the central banks and may be disappointed with the reality after this week’s ECB outcome and next week’s Federal Reserve meeting.
And while August Chinese inflation data disappointed overnight, inflation watchers will also focus on Brent crude oil prices climbing to their highest in a month overnight after hawkish comments from Saudi Arabia’s new energy minister.
Ten-year Treasury yields crept higher to their highest in almost three weeks, with the 2-to-10-year yield curve positive by about 5 basis points after briefly inverting late last month.
In stock markets, Wall Street shares ended flat overnight, but futures are up first thing Tuesday. Major Asia markets were flat to positive earlier, despite the shifting sands on bonds and the disappointing China inflation reading. European stocks opened higher.
In currency markets, the pound held most of its overnight gains as the UK parliament again rejected PM Boris Johnson’s call for a snap election next month, before it is suspended for the next five weeks.
Speculation is growing that Johnson may find some way seal a deal with the European Union before the EU summit on the Oct. 17-18, with variations of the Irish border backstop being discussed openly again. If he doesn’t, parliament has passed a law instructing him to seek an extension to the Oct. 31 deadline.
Goldman Sachs said on Monday it now saw more than a 50% chance of a Brexit deal ending the crisis. BoE chief Mark Carney speaks in New York later in the day, with UK jobless numbers released before that.
The dollar’s DXY index was up, with dollar/yen jumping to its highest since Aug. 2 as some safety plays unwound with bond yields rising. Euro/dollar held above $1.10 into the ECB meeting. China’s yuan strengthened despite the soft inflation numbers.
In European corporate news, European tech stocks, especially the software names such as SAP, Temenos, and Software AG, are in focus after yesterday's rout in software stocks in the United States. The UK's Sage is seen up 1% on its plan to sell its payments unit.
There were more woes for the autos sector as Moody’s downgraded Ford’s bonds to junk, citing “considerable operating, competitive, and market challenges facing the company, and the resulting pressure on its earnings and cash generation measures.”
UK housebuilders could get a boost after Britain's Galliford Try said it had restarted preliminary talks with Bovis Homes to combine their housing businesses. Barclays shares are seen down 1% to 2% after it increased the money it had set aside for the mis-selling of payment protection insurance.
In Spain, banks are bracing for a preliminary ruling from the European Court of Justice on whether they charged some customers too much for mortgages, a decision which could eventually lead to their paying out billions of euros in compensation.
Richemont shares, which have had a decent run recently, may come under pressure after the luxury-goods maker’s head of fashion and accessories stepped down.
In earnings, JD Sports is seen up 3% after in-line results; Ashtead down 1% on in-line results as traders see this as opportunity for profit taking; Switzerland's Partners Group is seen falling 2% on a first-half revenue miss.
— A look at the day ahead from EMEA markets editor Mike Dolan. The views expressed are his own —