Euro, bond yields drive higher on ECB scale-back bets
The euro hit a 1-year high on Wednesday and German 10-year Bund yields continued to rise after doubling the previous day, as bets grew that the European Central Bank is readying to scale back its 2-trillion-euro stimulus programme. It was a lively European session. The bond market sell-off and jump in the euro came as a dive in technology stocks after the latest global cyber-attack sent European shares to a two-month low. The euro was eyeing up $1.14 and was at a 7-month high versus the pound though it hit the brakes after ECB sources said President Mario Draghi’s comments on tweaking the bank’s aggressive stimulus policy had been over interpreted. The common currency is now up almost 10 percent this year. The head of the Federal Reserve, Janet Yellen, and one of her lieutenants, Patrick Harker, said on Tuesday that they expected to continue raising U.S. interest rates, but it couldn’t rally the dollar. That provoked the banking world’s single biggest cheerleader for a stronger dollar, Deutsche Bank, to declare the end of the greenback’s bull run which dates back to 2014. “I do think the euro now has got quite significant momentum behind it and I think that will build towards the confirmation of some tapering announcement this year. So I would be long the euro on a tactical basis for the rest of the year,” JPMorgan Asset Management’s Global Market Strategist, David Stubb, said.
China c.bank to hold off on tightening to meet growth target-sources
China’s central bank will hold off on further monetary policy tightening and could even slightly loosen its grip in coming months as a deleveraging drive threatens economic growth and job creation ahead of a leadership reshuffle, policy insiders said. Higher short-term funding costs, driven by a regulatory crackdown on banks’ riskier financing, have started to spill over into the real economy, a risk to economic stability ahead of this year’s Communist Party Congress, when President Xi Jinping is expected to consolidate his control. The challenge is to counter the risks from excessive debt and shadow banking without endangering a growth target of around 6.5 percent – and previous experience suggests growth will be the priority. “The leadership favours stability this year. We don’t want to boost growth aggressively but we cannot allow growth to slow too sharply,” said a policy adviser. “Many companies face difficulties and higher interest rates will push up borrowing costs, which will be unfavourable for economic growth.” The sources are involved in internal policy discussions and offer advice to policymakers but are not part of the final decision-making process.
Bond prices rebound from lows as market reconsiders Draghi comments
U.S. Treasury prices weakened on Wednesday, but came off their lows on reports that markets had misinterpreted comments by European Central Bank President Mario Draghi on Tuesday as being more hawkish than he had intended. Bonds weakened and the euro gained on Tuesday after Draghi indicated that the ECB might tweak its stimulus so that it does not become more accommodative as the economy recovers. Reports on Wednesday, however, said that Draghi intended to signal tolerance for a period of weaker inflation, not an imminent policy tightening, according to sources familiar with his thinking. “The big trigger of action this morning has been the walk back of Draghi’s more hawkish comments yesterday,” said Guy Le Bas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. Benchmark 10-year notes were last down 4/32 in price to yield 2.212 percent, up from 2.20 percent late on Wednesday. The yields rose as high as 2.256 before the ECB reports. The yield curve between five-year notes and 30-year bonds steepened after falling to 91.9 basis points overnight, the lowest since late 2007. The yield curve has flattened in the past month as Federal Reserve officials indicated that further monetary policy tightening was likely even as inflation falls below targets.