- U.S. equity markets closed higher and Asian bourses are trading with gains.
- Economic data continue to point to a period of slower global growth.
- Big rally in European peripheral bonds yesterday - EUR/CHF trades near 1.23.
- Bank of England announces extension to the Funding for Lending scheme.
- Focus today is on German IFO and U.S. durable goods orders.
Risk markets have rallied despite disappointing manufacturing PMIs in China (50.5 versus consensus 51.5), followed by Germany (47.9 versus consensus 49.0) and the U.S (52.0 versus consensus 53.9) .
There are clear signs of a soft patch in global growth, but decent earnings releases (in an overall mixed earnings period so far) and expectations of an ECB rate cut helped the move into risk assets on Tuesday. One clear difference between Wednesday and the Q2 softness seen in 2010, 2011 and 2012 is the pricing of euro tail-risks. In previous year,s Europe has either triggered or amplified the correction in risk assets but this time support remains – and Tuesday was another strong day for the peripheral bond market.
10Y government bond spreads against Germany narrowed across the board led by Spain (-24bp), Portugal (-17bp), Ireland (-17bp) and Italy (-14bp). The absence of sovereign credit stress in Europe is a key positive and, if maintained, should help mitigate the negatives from a period of slower global growth. The Bund yield closed 3bp higher and Treasuries were broadly flat after reversing early gains.
U.S. stocks closed with decent gains (S&P500 up 1%) but following high intraday volatility. A fake Associated Press tweet saying “Breaking: Two explosions in the White House and Barack Obama is injured” sent stocks about 1% lower for a moment, until it was learned that the account had been hacked.
Asian bourses are trading with gains led by strong performance in Japan. The yen was weaker overnight, but the USD/JPY has still not managed to break above 100. The euro has been able to sustain increased pricing of an ECB rate cut fairly well, as tighter sovereign spreads have counteracted weak data. The EUR/USD traded around 1.30 overnight, and the EUR/CHF (the big mover since Tuesday) has jumped to almost 1.23.
The EUR/CHF has traded with a very high correlation to European money market rates since December. The move higher may seem at odds with expectations of an ECB rate cut. However, the overvaluation of the Swiss franc is mainly a result of European sovereign concerns and the big peripheral rally is likely to have helped push the higher. Both the EUR/SEK and EUR/NOK were higher overnight as well.
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