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Markets Update, 21 July

 

 

 

  • Global Shares Flat
  • Bond Yields Decline as Euro Strengthens
  • Increased hawkishness from the ECB helps the Euro rally

 

 

Bonds gained and the euro headed for its strongest level against the dollar since January 2015 on bets the European Central Bank will start tapering its stimulus program. European stocks fell as the common currency’s rally weighed on carmakers and other exporters.

Increased hawkishness from the ECB has helped the euro rally from lows last seen near the start of the millennium, with investors expecting tapering to start in the new year and pricing in a 10 basis point rate hike by September 2018.

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European Markets down

The Euro Stoxx 600 opened down 0.2 per cent, adding to global weakness in equity prices seen in Asian trading.

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Global equities were little changed on Friday as investors continued to digest the latest batch of messaging from central banks.

Futures markets pointed to a roughly flat opening on Wall Street.

In Australia the S&P/ASX 200 was off 0.7 per cent to 5722.8. BHP Billiton declined nearly 3 per cent after Elliott Advisors said it had “deep concerns” over the miner’s multibillion-dollar plan to enter the fertiliser market.

Other major Asian indices fell. Japan’s Topix index was down 0.2 per cent snapping two days of gains.

In Hong Kong the Hang Seng index was down 0.1 percent, struggling to notch a 10th consecutive day of gains to match a winning streak recorded in November 2011.

Strong Euro

Euro jumps to 2y high vs Dollar. Now at >$1.1670

 

Summarizing the market reaction, Yann Quelenn, a market strategist at Swissquote Bank said,“Draghi tried to talk the Euro down, even going so far as to suggest that ECB’s quantitative easing could be increased and prolonged. But the currency markets were not buying Draghi’s line, and neither are we. Available bonds are too scarce, and turn to a taper is too clear to disguise.”

As a result, bonds jumped even as the euro headed for its strongest level against the dollar in almost two years on bets the European Central Bank will start tapering its stimulus program despite Draghi’s sounding particularly dovish, with the greenback already under pressure from U.S. political developments. Yields on Italian bonds dropped…

 

Equity investors are struggling to get used to the prospect of life without the ECB providing a floor to markets. While their reliance on the central bank for cues has eased somewhat — stocks and the euro are both up for the year — this week’s moves show Draghi’s words still hold sway. The currency gains put even more pressure on European companies to generate better earnings at home to counter the blow to exporters.

 

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A strong euro still spooks European stock traders, even when Mario Draghi starts talking up the region’s economy.

A profit revival after years of stagnation boosted optimism about European stocks in the first half of the year, but the rally has been losing steam since mid-May as the common currency strengthened. While that has helped the equities attract $26 billion this year, the region’s previous false starts are keeping bulls in check.

Fixed income

On Thursday, the ECB left its stimulus measures unchanged but signaled it would discuss how to proceed with interest rates and bond buying—part of its bid to stimulate the regional economy—in the fall.

Neither the Bank of Japan nor the European Central Bank announced a shift in policy on Thursday. But the euro leapt 1% against the dollar after ECB President Mario Draghi reaffirmed his confidence in the eurozone economy and said the central bank would discuss the future of its massive asset-purchase program in the fall.

Still, with inflation remaining tepid in much of the developed world, most investors expect global central banks to move slowly when withdrawing the monetary stimulus.

The yield on 10-year US treasuries was a basis points lower at 2.25 per cent, while the yield on Japanese 10-year bonds were flat at 0.068 per cent.

Commodities were little changed in early trading in Europe. Brent rose 0.02 per cent to 49.3. Gold added 0.3 per cent against the dollar to touch $1,247.51.

European bond yields fell marginally in early trading. The 10-year bund yield, which moves inversely to prices, dropped 1 basis point to 0.52 per cent, while the Spanish and Italian 10-year bond yields weakened 3 and 4 basis points respectively.

Even as Europe prepares to tighten the monetary taps, investors appear unfazed about the prospects for its most fragile economies.

The bonds of the weakest economies have risen in value relative to ultrasafe Germany, despite expectations that the European Central Bank will reduce its stimulus—which has benefited these economies the most.

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At the start of 2017, less than a fifth of investors surveyed by Citi Research believed that peripheral European spreads would end the year lower. Yields move in the opposite direction to process prices.

But since December, when the ECB said it would reduce bond purchases by €20 billion ($23 billion) a month, Spanish, Portuguese, Irish and Greek bond yields have declined in comparison with German yields.

The spread between German yields and those on other bonds is commonly used as a measure of the risk that investors attach to holding other debt.

 

Asia Markets

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