The unwinding of the long bonds/long US dollar position is continuing this week after it appeared to have reached climactic proportions last week. Eurozone benchmark 10-year yields are 11-12 bp higher today. Gilt yields are up almost as much. Despite some encouraging signs from the Eurogroup meeting yesterday, 10-year Greek yields are up 15 bp. US 10-year Treasury yield is being pushed a six basis points higher as well and is now near 2.34%.
The sell-off in bonds is taking a toll on equities. European equities are sharply lower, with the Dow Jones Stoxx 600 off 1.6%, led by telecom and health care. The S&P 500 are called nearly 1.0% lower. MSCI Emerging Market equity index is off 0.8%, and that is of course before Latam markets are included. Asian equities fared better as the Shanghai rallied more than 1.5%, and Japanese markets eked out a small gain.
The news stream is limited to largely two developments in Europe. First, the UK industrial output figures were stronger than expected. Since the surprising election results, the market has been inclined to buy sterling and today’s report provided a fundamental reason. Moreover, there is some expectation that Bank of England Governor Carney may cast tomorrow’s Quarterly Inflation Report in somewhat less dovish terms.
Industrial output rose 0.5% in March. The consensus was for a flat reading after a 0.1% rise in February. Manufacturing rose 0.4% after a 0.5% rise in February. The consensus forecast was for a 0.3% rise. Recall that the March manufacturing PMI rose to 54.0 from 53.9 but slipped back to 51.9 in April.
Sterling rallied through the 200-day moving average near $1.5625. The next target is the $1.5785 area from last December. Beyond that lies $1.5880, the 50% retracement of the decline since last July when it was near $1.72.
The other development is in Sweden. A soft inflation report and Riksbank minutes were released at the same time. The take-away is the Riksbank could expand its bond purchases intra-meeting as it does not have a policy meeting scheduled until July 2. The Riksbank seems more comfortable with buying more bonds than necessarily pushing yields further into negative territory (repo rate is -25 bp).
