News & Views: Monday, August 25
What you need to know for today's trading day.
Europe Government Bonds Surge as Draghi Signals ECB Closer to QE (Bloomberg)
French economy minister urges alternative to German austerity (Reuters)
China Developing an Operating System to Take on Microsoft, Google and Apple (NYTimes)
Burger King in Talks to Buy Tim Hortons in Canada Tax Deal (WSJ)
Roche to Acquire InterMune for $8.3 Billion (WSJ)
CME's Globex session was halted for four hours last night due to technical issues and the open was delayed until 10pm ET from the usual 6pm. No reason has been given.
The largest gains in risk assets overnight were seen in Eurozone sovereign bonds. The 5yr Bund is down 5.6bps to 16.6bps, statistically below the term rate of 1bps over the five years. The same reaction is seen in Italian and Spanish 5yr bonds at 1.06% (-11bps) and 0.77% (-13.6bps). In his speech on last Friday afternoon at Jackson Hole, ECB President Mario Draghi warned about the sharp dropoff in inflation expectations in the Eurozone, specifically that the 5yr5yr forward, has declined to below 2%. He also pointed to shorter-term real rates continuing to fall, which were viewed as a dangerous progression. The central bank remedy for this is to provide more liquidity to synthetically increase inflation expectations - actual inflation is only 0.4% YoY and remains persistently low. The 10yr Bund - 10yr Treasury spread is nearing a record wide, currently at 145bps. The record wide is 169bps, although that only occurred for a single week and the prior is 153bps.
I found the speech by BoE Deputy Governor Broadbent the most interesting of them all, even though it had the smallest market effect. He noted that because credit demand still remains weak - outside of real estate - and debt levels high in the UK that the central bank can only tighten rates at a gradual pace. From prior BoE policymaker speeches we know that "gradual" equates to less than 100bps in hikes per annum. Some participants are worreid that central banks will get behind the curve and have to tighten very rapidly, such as 250bps-300bps in a year, which will shock global interest rates. At least for the time being, that case is removed from the table by policyamkers.
Greece is going to be re-opening its 3- and 5-year PIK bond issues to "increase liquidity in that part of the yield curve." The new bonds principal and coupon will be repaid using T-bills rather than cash. If the the liquidity statement is truly the case, that means the new issues were from a reverse inquiry - the market asked Greece to issue them. This is another example of investors dropping down in credit quality to get returns. Suffice to say this is a win for Greece, even if they do not have a cash issue the market is essentially giving them a blank check.
The entire French cabinet resigned this morning disputing economic policy as too austere and slavish to Germany. So there's that.
- German IFO business climate (August) down to 106.3 vs 107 expected, prior 108.0
- German IFO Expectations down to 101.7 vs 102.1 exp, prior 103.4
US Economics (Time Zone: EST)
10:00 New Home Sales (July) - expected 428K, prior 406K
10:30 Dallas Fed - exp 13.0, prior 12.7
11:30 Treasury to sell $29b 3-month bills and $25b 6-month bills
Prospect Capital (PSEC)
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