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Friday’s larger than expected 271,000 increases in non-farm payrolls in the US during the month of October caught the market by surprise as previous prints had come significantly below par. The August and September disappointing readings were in fact one (out of a number) of factors which propelled the Federal Reserve to keep rates on hold. Now, with an improving jobs market, things appear rosier for the US economy, with market expectations of a December rate hike heightened once again, resulting in a marked sell-off in US Treasuries, and subsequently their European counterparts (German Bunds), with yields back at July levels in the US.
Unemployment too was encouraging, registering a 0.1% drop from 5.1% in September. Undoubtedly, market focus will now turn to the next FOMC meeting and whether Friday’s data is enough to warrant a December rate hike. There are a number of arguments in favour and against this scenario, but the higher wage growth (in the form of a 0.4% m-o-m increase in average hourly earnings) is surely to give the more dovish FOMC members some food for thought in the run up to the 16 December 2015 meeting.
Credit spreads particularly within the HY space in the eurozone have continued to rally and the grind tighter persisted. By historical standards though, as a result of the recent widening in IG bonds, spreads remain wide and hence more attractive than their HY counterparts. We would expect this spread tightening to persist into the year end. The European HY bonds market has been the better performer in recent weeks due to the fact that the higher coupon higher yielding bonds serve as a buffer to sharp abrupt spikes in benchmark yields, with greater emphasis given to the equity-portion (credit risk vs interest rate risk) of HY bonds.
With most of European companies having reported, the markets will be closely monitoring the upcoming earnings results of HY companies. Most importantly, this week’s Q3 GDP announcements for the Eurozone and a number of European economies, namely Germany, France, Italy, Portugal and the Netherlands, to name a few. These GDP releases come only a few days after an announcement by the European Commission that it had cut its inflation and growth forecast for the single region for 2016 on the back of more challenging global conditions and fading incremental benefits from a lower price of oil.
On a final note, Thursday will mark the last Monetary Dialogue for 2016 between ECB’s Draghi and the European Parliament’s ECON (Committee on Economic and Monetary Affairs), whereby Draghi is expected to present the ECB’s perspective on economic and monetary developments. A discussion is expected to ensue, with 2 key topics to be discussed: (1) “the ECB’s role in the design and implementation of financial measures in crisis countries; and (2) is globalisation reducing the ability of central banks to control inflation?” With inflationary numbers in Europe lagging, and growth failing to have picked up considerably so far (bar any surprises to the upside on Thursday), Draghi might very well touch upon the idea of adding more monetary stimulus. Following the release of GDP figures this week, the focus now shifts to the 03 December 2015 MPC meeting.
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