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Following the bout of central bank meetings last week, fixed income and equity markets will be digesting some key top tier macro data during the coming week. On Wednesday, unemployment data in the UK and the long awaited Bank of England Inflation Report will be eagerly awaited given the improvements in the labour market and the implications for monetary policy. Moreover, euro area CPI figures as well as the ECB Survey of Professional Forecasters will add to the information set regarding ECB policy. On the same day, euro area GDP numbers for Q1 will also be announced. The market will be focused on this number, as a low inflation figure could propel the ECB into action as early as next month, as indicated by the central bank itself in its rate setting meeting last week. Whatever happens, bond yields are expected to be pushed lower and cause credit spreads to tighten further.
With the likelihood of additional liquidity injections, the rally could maintain momentum; although yields are at record lows, the same cannot be said for credit spreads most notably across the capital structure of the financials space. There could be a bout of profit taking, but this is not expected to be short-lived because no one would want to miss out on the crucial basis points earned at this time of the year, despite the positive performance so far. Eventually, this may change once central banks begin to withdraw liquidity, but even then, analysts are not certain that risk appetite will wear off that much.
Following a busy end of week last week, the primary markets had a very strong start to the week, with a flurry of new bond issues being printed yesterday. As is customary on days when primary market activity takes centre stage, the secondary market was somewhat muted and the spread rally slowed down amid light flows.
A key announcement yesterday was the Spanish Treasury’s launch of its first very own inflation-linked bond which is expected to be priced later on this week. They had already announced their intention to launch an inflation-linked program indexed to Euro area inflation in their “2014 strategy” document, as their intention is to "launch a program with a view to, in the next few years, establish a curve of outstanding references that can be made liquid through frequent re-openings".
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