LIVE MARKETS-Bond yields misdirection

Reuters · 01/06/2023 10:33
LIVE MARKETS-Bond yields misdirection

Bank holiday in Italy, Spain, Sweden

European shares set for biggest weekly gains since November

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Bund yields lost as much as 30 basis points in three sessions, before yesterday’s slight increase, but optimism over fading inflation might be misplaced.

Both risky stocks and safe-haven bonds benefitted from hopes that central banks will have an easier job tackling inflation and could tighten less their monetary policy.

However, there are market participants who beg to differ.

“We think the mostly energy-related drop in inflation in December is a red herring,” ING analysts said. “Whilst helpful at the margin, we think core inflation should be a better predictor of European Central Bank policy.”

“This drop in yields has been as sudden and relentless as the rise into year-end,” they added. “Swaption implied volatility is down since its September peak but there are signs so far that 2023 will prove a calmer year.”

“One-offs like the German gas payment, as well as slumping French petrol prices have driven the CPI surprises, but look set to reverse again in January,” says Michael Leister, head of rates & credit research at Commerzbank.

“In addition, core inflation rates - which the ECB keeps on stressing are key - remain elevated, reducing the odds for less hawkish official communication,” he adds.

(Stefano Rebaudo)



The pan European STOXX 600 .STOXX index started the year with a bang and is set for its best weekly gain since mid-November, having risen more than 3%. The index was treading water on Friday, however, ahead of data on euro zone inflation and U.S. jobs.

Euro zone inflation figures are due at 1000 GMT.

In thin trading due to bank holidays in some European countries including Italy, Spain and Sweden, the STOXX 600 was little changed on Friday. The oil and gas sector .SXEP was up 0.6%, supported by Shell's SHEL.L shares.

Europe's largest oil and gas company reported earnings from its liquefied gas trading operations are likely to have been significantly higher in the fourth quarter of last year despite a sharp output drop owing to plant outages.

In the UK, Clarkson CKN.L shares rose around 6% after the company's upbeat full year outlook.

(Joice Alves)



Not yet the end of the first trading week of the year and festivity is giving way to familiar tension.

Ukraine has rejected Russia's order for a ceasefire over Orthodox Christmas as a trick. No compromise is forthcoming, either, on Capitol Hill, with 11 failed attempts at installing Kevin McCarthy as House speaker underscoring dysfunction there.

The Fed is at loggerheads with markets betting on rate cuts by the end of the year, and Asia's bullishness about a recovery in China is increasingly at odds with global sentiment.

The MSCI Asia ex-Japan index .MIAPJ0000PUS hit a four-month high on Friday, while Wall Street indexes test recent lows. The dollar is refusing to fall.

European inflation data on Friday can set the stage for U.S. jobs data due later in the day as the figures can offer the latest state-of-play for consumer prices and the economy.

A bigger-than-expected drop in the speed of German consumer price rises unleashed a bond rally across Europe earlier this week. But only small declines are forecast.

The U.S. economy likely maintained a solid pace of job and wage growth in December, and that could again stymie bets that an end to rate rises is coming anytime soon.

Key developments that could influence markets on Friday:

- U.S. -farm payrolls (December)

- Fed's Cook, Bostic, Barkin and George all speak

- Euro zone flash inflation (December)

(Tom Westbrook)



European futures point to a start of the day in positive territory for bourses across the region as traders braced for today’s release of December euro zone inflation and U.S. jobs data for clues on how aggressive central banks will be in tightening policy.

The euro zone flash inflation estimate is expected to have slipped below 10%, writes Ipek Ozkardeskaya at Swissquote. "A softer European inflation could soften the ECB hawks, but it will hardly change the ECB’s determination to further tighten its policy for ".

In the U.S., -farm payrolls are forecast to show on Friday that 200,000 jobs were created in December, easing from November's 263,000 pace, according to a Reuters survey of economists.

(Joice Alves)