Intraday Market Thoughts

Eurozone Investors Stuck With Negative Choices

by Adam Button
Apr 9, 2015 23:59

ECB quantitative easing is working but it might be working too well. The euro plunged on Thursday while the Aussie led the way. Chinese CPI is due later.  In today's Premium Insights, a new trade was issued and currently in progress.  GBPAUD and CADJPY were  stopped out.

The euro broke below 1.0725 in US trading on Thursday and didn't stop falling until 1.0638. There were some murmurs about Greece and deposit outflows after emergency bank lending was hiked but officials  paid the money due to the IMF.

The larger driver is yield differentials. The US Treasury had an extremely weak bond auction, pushing 30-year bond yields to 2.6%, up 9 basis points from the earlier lows. Meanwhile, German bunds hit a fresh record low at 0.139% and French 5s fell into negative territory. Yields are also negative on issues dated 2 years or less in Austria, Belgium, Finland, Ireland and Holland.

The ECB has just passed the first month and 60 billion euros of a trillion euro experiment. It's extremely unappetizing for investors to consider buying bonds with negative yields and even the ECB won't buy below its -0.20% deposit rate. In the US, investors were able to move down the corporate ladder but the euro-denominated bond world is much smaller.

Some investors are clearly being chased into stocks as the CAC hit a record Thursday. Others are going into Treasuries and that's something that will keep downward pressure on the euro. Corporates and sovereigns are also coming to Europe. Mexico launched a 100-year bond this week and US multinationals may increasingly issue euro bonds and immediately convert them to US dollars.

Both trends are only in their infancy and with the ECB set to buy for more than a year, more is coming. At some point before the ECB hits 1 trillion euros (and with EUR/USD below parity) Draghi may start to have second thoughts.

Another central bank with something to mull over today is the PBOC with Chinese CPI data due at 0130 GMT. The consensus estimate is for prices to rise just 1.3% y/y compared to 1.4% previously. In any case, there is leaves plenty of room for stimulus but there has been no indication of imminent Chinese easing as leaders try to rebalance.

Act Exp Prev GMT
Consumer Prce Index (MAR) (m/m)
-0.6% 1.2% Apr 10 1:30
Consumer Prce Index (MAR) (y/y)
1.3% 1.4% Apr 10 1:30

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