Weekly Fundamental Analysis: European Bond Markets Were More Attentive

learnt a harsh lesson from financial markets on Friday: You take on the Federal Reserve at your peril. Even though both the European Central Bank and the Bank of England had told bond investors that the increase in European borrowing costs did not reflect the probable long-term low interest rate environment, the markets only listened briefly.

The European bond markets were more attentive to indirect evidence from US non-farm payroll data, which might signal that the Fed would soon rein back its quantitative easing, than the direct words from the ECB and BoE that rates would stay rock bottom for a long time. Federal Reserve is tying the performance of the jobs market to any future reduction of its quantitative easing policy, nothing matters more than payrolls.

June payrolls delivered with a monthly gain of 195,000 jobs, a solid 0.4 percent jump in average hourly earnings and upward revisions for prior months. The slight nudge higher in the unemployment report to 7.6 per cent reflected a rise in people who have resumed the search for work, another sign of growing confidence in the recovery. The steady improvement in the jobs market vindicates the view at the Fed that some reduction in the pace of QE is warranted, with investors expecting a starting date in September. Not surprisingly the initial reaction across holiday-thinned markets consisted of a stronger dollar, firmer equities and a 10-year yield rising above 2.70 per cent.

EUR/USD had another week of falls, due to a bearish turn in the euro-zone and more reasons to seek opportunities in the US. At the Press conference following the ECB rate decision, President Mario Draghi confirmed recent rumors about adopting forward guidance on rates, saying the ECB “expects all interest rates to remain at present or lower levels for an extended period of time”. The Banks Governing Council is planning to do what no board has ever done before: pre-committing on future interest rate policy.

It is the 3rd consecutive week the Dollar gained against the Yen and looking as he is back on track after a month of setback as uncertainty of the BOJ plan encompassed the future of the pair. The critical 100 level has again been struck. The pair closed slightly above the 101 level, at 101.18.

The Australian dollar is still getting worn out and has lost almost 15 cents since mid-April this year against the US dollar. AUD/USD closed the week at 0.9065 and it seems as more bearish sentiments to come this week. Last week’s sole Australian release was Private Sector Credit, which was uneventful. It was a different story in the US, as most releases looked sharp, and this bolstered the US dollar, as it continues to chip away at the struggling Aussie.

The sterling continues to lose ground against the US dollar this is the 3rd week. Since mid-June the pair has lost more than 8 cents and closed at 1.4886 this week. It was a gloomy week in the UK. British Current Account, the only British key event last week, was a major disappointment, as it posted a larger deficit than forecast. The pound got no help as the British government announced deep spending cuts as the economy continues to struggle. Meanwhile, US releases were mostly positive last week, helping the dollar post more gains at the expense of the pound.

Important announcements this week:

·Monday:
EU - Eurogroup Meetings, ECB President Draghi conference.
Japan - Current Account.

·Tuesday:
NZ - NZIER Business Confidence.
UK - Manufacturing Production m/m.

·Wednesday:
USA - FOMC Meeting Minutes and Fed Chairman Bernanke conference.

·Thursday:
Australia - Employment Change and Unemployment Rate.
Japan - Monetary Policy Statement and BOJ Press Conference.
USA - Unemployment Claims.

·Friday:
USA - PPI m/m and Prelim UoM Consumer Sentiment.