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Market Talk — June 8, 2016

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Asia did not provide much direction overnight as core indices were pulled in either direction. The Nikkei was the top performer, closing just under 1% better having spent most of the day in negative territory. The JPY strengthened as the day progressed but has just retraced much of that and is closing around mid-range for the day around 107.00. Stocks failed to capitalize on rising oil prices even as it broke the $51 mark. Dealers continue to discuss the “lower for longer” term and hence are happy sticking with fixed-income for safety and yield. Lots of talk about the proposed Income Tax in Saudi Arabia for expats. Still very much in the discussion stage but worthy of discussion even as the oil price climbs. China’s May exports were released lower than expected, which obviously hit stocks late on. The yuan was also back in the spotlight as it was marked lower this week by PBoC (off-shore was last seen trading at 6.5670).

European indices were all lower except for FTSE, which did manage a small (0.3%) gain. The DAX, CAC, and IBEX all closed around 0.7% lower on the day. However, the main topic of discussion in Europe was around the ECB’s corporate buying program (CSPP). From what we hear, the ECB will use central banks of Germany, France, Spain, Italy, Belgium, and Finland to purchase euro paper in their particular part of the market. The bonds must have a minimum of six months and a maximum of 30 years, be investment grade, and within the euro area. This will distort asset prices around the world as many will sell euro paper and purchase USD paper, creating yet another huge leveraged carry trade.

US indices eventually climbed back to session highs as we played in a relatively narrow range. US data (Job Openings) was marginally better than expected and coupled with oil’s rally (lower inventories) it definitely helped sentiment by the end of day.

The story in Treasuries today was the absorption of the $20bn 10yr notes at the psychological 1.70% yield. Talk is that the ECB certainly is putting a bid under the bonds but also is flattening the curve. US 2/10 curve closed this evening at 92.5bp (as 2’s were 1bp lower at 0.775%). In Europe, the German 10yr lost a little of its bid as dealers unwound corporate trades having seen a very nice run on their positions (thank you Mr. Draghi). 10yr Bund closed 0.055% closing the US/Bund spread at 164.5bp. Italy 10yr was 3bp tighter at 1.39%, Greece 7.22% (-9bp), Turkey 9.29% (-2bp), Portugal 3.05% (-4bp) and UK 10yr at 1.25% (-1bp).