Posted Nov 11, 2015 by Martin Armstrong
Asian Equity markets really had no idea which way to play today after a mixed set of economic data releases. The Retail Sales was marginally better than expected at 11% (estimates were for around 10.9%), whilst the YoY Industrial Output release failed to meet the forecasted 5.8% expectation as we saw a 5.6% print. As a result most core markets closed around unchanged with very little incentive to move in either direction. In Europe all the talk continues to focus on the ECB and their next QE move and the resent press reports of potentially larger cuts to the DEPO rate. A partially close US market saw stocks drift closing down around -0.3%.
The US Dollar also gave some ground back today with gains seen for GBP, TRY, and JPY but we continue to see the Russian Rouble drift with energy prices. The DXY (USD Index) closed a quiet day slightly weaker at 99.05 (-0.35%).
Still the concerns are for a global slowdown and there is nowhere that is having a greater impact than in the Oil market. Again today, we saw prices for WTI and Brent off around 3% each, which puts the YoY level down to around -44%.
The Bond Market in Europe is something we quote most days but not so much in detail. So, as of closing this evening I want to provide a quick over-view of just how extreme the European Bond Market pricing has become. In Germany the 1yr rate for government bonds closed this evening at -0.33%, with 2yr at -0.35%. It is not until 7 years do you actually see a positive return (7’s are +0.12%) in the yield curve; with 10yr closing this evening at 0.61bp. A similar yield for the US Treasury market would be 2yr at 0.87%, 5yr at 1.71% and 10yr at 2.33%. I often quote the spread between 10yr US and Germany (which incidentally closed at +173bp tonight) but not often the peripherals.
The Italian government bond market currently rated by S+P (Standard and Poors) is BBB-; is the lowest limit that is accepted as investment grade. A view of the yield curve would see 2years at 0.09%, 5yr at 0.58% and 10yr at 1.63%. This compares with the USA (AA+) 2yr 0.87%, 5yr at 1.72% and 10yr at 2.33% implying a negative spread for a positive credit. Client could sell Italian 5yr paper (at 0.58%) buy US 5yr paper (at 1.71%) and collect 114 basis points. It is possible to do this spread at 10yrs and take-out 172bp. Similar credits with a BBB- rating would be Kazakhstan, Romania, Morocco, Azerbaijan, Montserrat and Uruguay.