May 31, 2018
Treasury Volatility Reawakens With Biggest Jump Since 2016
Italian politics just did what a correction in U.S. equities and a breach of 3 percent on the U.S. 10-year yield could not: knocked the Treasury market out of its slumber. Rates volatility has re-emerged, with Merrill Lynch’s MOVE Index surging by 9 basis points on Tuesday. That’s the biggest one-day advance since February 2016 for the gauge, which tracks the implied volatility in U.S. debt across the yield curve. Around that time, fears of a hard landing in China’s economy sparked a retreat in risk assets that had traders placing non-trivial odds on the possibility of the Federal Reserve having to cut rates into negative territory. Treasury traders were indeed whipsawed on Tuesday, as the 10-year yield fell from above 2.9 percent to below 2.8 percent overnight. They then proceeded to retrace most of the move before the cash open in U.S. equities before tumbling yet again to end the session below 2.8 percent, their biggest drop since the aftermath of the U.K. Brexit referendum in June 2016. Bond market volatility hasn’t been sounding alarm bells in 2018 despite rocky rides for risk assets. February’s record one-day jump in the Cboe Volatility Index, which tracks the implied swings in U.S. stocks, stayed confined to that asset class. Strategists took the lack of contagion as a positive signal, as it suggested an idiosyncratic shock had occurred rather than a shift in the fundamentals. That rates volatility has jumped alongside its equity counterpart this time around may make investors more wary of holding leveraged positions and could also stress trading strategies that rely on implied and realized price swings to determine their exposure to the market. And they’re getting whipsawed again. The yield on the 10-year note rose 7 basis points to 2.85 percent as of 8:29 a.m. in New York.
Euro-Area Inflation Picks Up to Fastest in More Than a Year
Euro-area inflation hit the fastest pace in more than year, some good news for European Central Bank officials debating the future policy path just as turmoil in Italy revives memories of the debt crisis. The 1.9 percent rate, effectively in line with the ECB’s goal, was up from just 1.2 percent in April and above the 1.6 percent reading forecast by economists. The core measure rose to 1.1 percent, also better than anticipated. Stronger-than-anticipated figures in Germany and Spain on Wednesday hinted at an upside surprise, with the rate in the former reaching a 15-month high. The euro stayed higher after the euro-zone data, and was up 0.1 percent to $1.1681 as of 12:24 p.m. Frankfurt time. While higher oil prices played a part, the inflation pickup is welcome news for the ECB, which holds its next policy meeting in exactly two weeks’ time. Officials led by President Mario Draghi haven’t yet ruled out announcing a gradual reduction in asset purchases at that gathering. Executive Board member Sabine Lautenschlaeger said this week that June “might be the month to decide once and for all” to end the program, pointing to resilient and robust economic growth. A bevy of recent indicators are challenging that view, hinting instead that momentum may be coming off the boil. Any softening could be exacerbated by a hit to confidence stemming from Italy’s festering political crisis. Other downside risks include an international trade dispute or a standoff between the U.S. and North Korea. Although it titled its latest economic assessment “Risks Loom Large,” the Organization for Economic Cooperation and Development issued upbeat projections this week. It sees euro-area growth of 2.2 this year, with inflation averaging 1.6 percent. In what policy makers are bound to consider good news, the Paris-based body said as a result of job creation and labor shortages, there were “clear signs that wages are finally on the way up.” Declines in joblessness, particularly in crisis-hit countries such as Spain, have helped fuel wages and are expected to continue to underpin consumption. Euro-area unemployment fell to 8.5 percent in April, a separate report on Thursday showed. That compares with 9.2 percent a year ago.
Italy Bonds Rise for Second Day as President Waits on Populists
Italian bonds climbed for a second day as the political turmoil that has rattled markets in recent days eased. Italy’s 10-year securities are well on the way to retracing Tuesday’s decline, with two-year yields falling back below one percent, finding support on the prospect of the Five Star Movement and the League reviving coalition talks. Anti-European Union rhetoric has also dimmed, with both parties insisting that they had no plans to ditch the common currency or abandon the EU. “This is a classic crisis dynamic — on Tuesday everybody gave up and now things slowly start to improve,” said Arne Lohmann Rasmussen, head of fixed-income research at Danske Bank A/S. “There is still tremendous carry and roll in the short end of the Italian curve, so people are dipping their toes.” Italian 10-year yields dropped 25 basis points to 2.67 percent as of 9:28 a.m. in London, having been as high as 3.44 percent on Tuesday, the highest since March 2014. The yield spread over their German counterparts was at 228 basis points, after closing at 290 Tuesday. Two-year bonds, which bore the brunt of Tuesday’s sharp decline with yields surging an unprecedented 193 basis points, yielded 0.97 percent, compared with a high of 2.84 percent two days ago. Euroskeptic Paolo Savona, who was vetoed by President Sergio Mattarella as finance minister, a decision that helped spawn the crisis in Italian bonds, may now become foreign minister instead, according to Corriere della Sera.
Hong Kong Stock Jumps 63% in Final Minutes Before MSCI Inclusion
Shares of a department store owner soared by a record in the final minutes of Hong Kong trading on Thursday, the day before it was added to an MSCI Inc. index. The spike turned Lifestyle International Holdings Ltd.’s 3 percent gain into a 63 percent gain in a matter of seconds. It closed up 43 percent, adding about $1.5 billion in value as index changes spurred one of the busiest trading days of the year in Hong Kong. The stock was added to the MSCI Hong Kong Small Cap Index after the close. Eudice Law, an external representative for Lifestyle International, said the company had no comment on its share-price movement. About 6.9 million Lifestyle International shares changed hands on Thursday, more than 3.5 million of them in the final 30 minutes, according to data compiled by Bloomberg. That compared with 2.4 million on an average full day this year. Hong Kong Exchanges & Clearing Ltd. has not received any report of an erroneous trade relating to Lifestyle International, spokeswoman Lorraine Chan said by email. Erroneous trades can be corrected under certain circumstances, according to HKEX rules. Index changes on the final day of the month made it a busy day for Hong Kong’s equity traders, who handled more turnover on Thursday than on any day since a massive offering in Tencent Holdings Ltd. shares two months ago. Erroneous orders can be costly for anyone caught on the wrong side. In March, BNP Paribas Securities was held responsible for a mistake that knocked almost 10 percent off the value of Taiwan’s third-biggest stock.