European Bond and Equity Markets Rally

Yesterday we saw resurgence in the European debt and equity markets following the recent sell off. The euro also tumbled the most in months following comments by an ECB official that the central bank has pledged to boost bond purchases before an anticipated mid-year lull.

Benoit Coeure said the ECB will increase purchases under its quantitative-easing program up from 60 billion euros in May and June, ahead of a drop-off in market liquidity. The euro also extended losses versus the dollar after a report showed residential construction in the U.S. surged in April to the highest in more than seven years, supporting the Federal Reserve’s move toward raising interest rates.

Germany’s 10-year bond yield dropped three basis points to 0.62 percent while Malta’s generic ten year government bond yielded around 1.55 percent.

New residential construction in the U.S. surged in April to the most since November 2007, indicating the industry regained its footing after a soft patch. The Fed is scheduled to publish the minutes of its April meeting on Wednesday as it debates the timing of higher borrowing costs.

European stocks rally

The Stoxx 600 jumped as all but one of the 19 main groups advanced. Auto shares led gains, with Volkswagen AG and Renault SA rising at least 3.8 percent, after a report showed European car sales increased for a 20th straight month in April. France’s CAC 40 Index and Germany’s DAX Index added 2.23% percent and Greece’s ASE Index climbed 3.1 percent.

Germany and France gave Greece until the end of May to reach a deal on its aid program, urging faster talks to end the standoff over the country’s financing.

The Euro traded significantly lower as the single currency ended the day -1.46% versus the Dollar at $1.115.

With the bulk of the headlines being taken up by the US data and Coeure’s comments, yesterday’s negative CPI figures out of the UK was put to one side somewhat. The lower than expected +0.2% mom vs. +0.4% expected reading for April was enough to push the annualized rate down to -0.1% yoy. This was the first yoy deflation reading for 55 years. Core inflation meanwhile fell to +0.8% yoy, below market consensus of +1.0% with transport services and air and sea fares in particular having the biggest downward effect. The drop in the core is to the lowest since 2001.

Sterling declined around 0.8% against the Dollar following the reading while 10y Gilts initially fell as much as 8bps lower in yield, only to then pare those moves and end the day more or less unchanged at 1.95%.

In terms of today’s calendar the bulk of today’s focus will be on the FOMC minutes of the April meeting. Before this we’ve got more Central Bank attention with the Bank of England minutes due out.