Sell-Off in European Sovereign Debt

July 6, 2017

Amid recent speculation that the policy stance of the European Central Bank may be nearing a turning point, a French government debt auction drew weak interest and triggered a broad rise in regional sovereign debt yields. 10-year yields rose 7 basis points in France and Germany, 6 bps in Italy, and 5 bps in the U.K. and Spain.  The German bund yield is at a 17-month high.

Taking a cue from the bonds, European equities are down 1.1% in France and Switzerland, 0.9% in Germany and Spain, and 0.8% in the U.K..

Share prices also fell 0.4% in Japan and Taiwan, 0.7% in Singapore, 0.2%  in Hong Kong and 0.1% in Australia. Stocks have risen, by contrast, in China, New Zealand, India, Indonesia and even South Korea.

Concern about tensions between North Korea and the United States depressed the won by slightly over 0.5%.  Against other currencies, the U.S. dollar has also risen 0.3% versus the kiwi and peso, 0.2% versus the Aussie dollar and 0.1% relative to the yen, while declining 0.2% against the euro and loonie and by 0.3% relative to sterling.

West Texas Intermediate crude oil bounced up 1.4% to $45.77 per barrel, and gold is 0.2% firmer at $1,223.90 per ounce.

German industrial orders failed to recover in May as much as expected. After dropping 2.2% in April, such rose 1.0% in May. In April-May, orders were 0.2% above the 1Q17 average. Orders in the first quarter had averaged 1.0% less than in the robust final quarter of 2016. In May, domestic demand for capital goods slumped 3.0%, but total industrial orders posted a year-on-year 3.7% advance.

Germany’s construction PMI settled back 0.2 points in June to a 2-month low of 55.1, which nonetheless signaled the third fastest rate of growth in that sector in the past 16 months.

Euroland’s retail purchasing managers index moved 0.2-point higher in June to a 23-month high, as the French component pulled ahead of Germany with a 74-month high of 56.3. Germany’s retail PMI slipped 0.5 points to a 3-month low of 54.5, and Italy’s index recovered 1.6 points to a 2-month high of 47.1.

Reaction in the FOMC minutes released yesterday afternoon has bee mixed. Some reviews stress the fact that a faction of the committee is prepared to announce the parameters of a program to shrink the Fed balance sheet as early as this September. Other review emphasize that the committee was not unified on whether currently lower inflation is temporary and when to act on the balance sheet.

Swiss CPI inflation slowed to 0.2% in June from 0.5% in May. Cypriot inflation dropped to 0.7%, and Dutch CPI inflation held steady at 1.1%.

Australia recorded a record trade surplus in May of A$ 2.471 billion as exports surged 8.5% on month while imports only rose 0.7%.

Business confidence in South Africa recovered from May’s 7-month low, rising 1.7 points back to April’s reading of 94.9. Sentiment benefited from a recovery of the rand that turned out to be temporary.

Scheduled U.S. data getting released today include the trade balance, the ADP estimate of private employment growth last month, and weekly jobless insurance claims. Canada releases trade figures and building permits.

Today is an important date in U.S. foreign exchange history. After the dollar floated in March 1973, it fell sharply in progressively more erratic trading. On Friday, July 6, 1973 the marketplace was highly dysfunctional. Up to that point, the dollar moved in a pure float, that is the government of President Nixon was unprepared to provide any steadying influence with currency market conditions. Seeing the market breakdown on July 6, a decision was made to again intervene when and as needed, and the conditions that day which saw an extreme lack of market depth, breadth, and resiliency became the standard against which henceforth it would be decided if market conditions are orderly or disorderly. If this litmus test seems arbitrary and highly subjective, it is. Different governments in the ensuing 44 years have had varying propensities to intervene, and for many years now, the use of currency intervention has been a policy tool out of favor by both Democratic and Republican administrations. But it was very important in the early formative years of a floating dollar.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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