A “Soggy” Bottom Morning


Ok, so you should note that 10Y JGB yields dipped below zero overnight for the first time since November 16, falling in sympathy with Treasury yields.


Obviously, that’s problematic for what it says about the market’s faith in the the reflation meme, but it kinda felt like a lot of people rushing to comment on Tuesday evening had forgotten that 0% is the target for the BoJ.

And indeed when the central bank maintained the purchase amount for 5-to-10 year maturities as it conducted its regular bond buying operation we got confirmation that the no one is ringing alarm bells just yet. “It was key whether the BOJ would cut its purchases or not, so the move today confirms its tolerance for the 10-year yield falling to negative,” Katsutoshi Inadome, senior bond strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “Zero percent itself does not carry much meaning for the BOJ,” Inadome concluded.

Ok, so that’s that. Moving on, the dollar cut some of yesterday’s losses and sterling gave back some of its gains after a wild session on Tuesday.  As Bloomberg notes, “the dollar gained against most of its major peers, driven by a rebound in Treasury yields [while] the euro failed to sustain early gains that marked a fresh high since March 30 at 1.0737 [as] French elections remain a focal point for euro traders, seen in volatility skews that cover the two rounds.”

Honestly, Wednesday morning feels like everyone is still trying to explain what happened on Tuesday rather than looking ahead. Here’s SocGen’s Kit Juckes with his morning take:

The currency market remains firmly in thrall to the bond market and the rout of the bond bears goes on, taking dollar bulls down in its wake. Soggy US housing starts and soggy industrial production data just reinforced the soggy message from last week’s figures, and with it the growing sense that the inflation peak is earlier and lower than many feared. So there’s not much to make people sell bonds or buy dollars here.

The US data and the fall in US yields weren’t Tuesday’s big story of course. It was, rather, the UK Prime Minister’s decision to engineer a vote in parliament to call a snap general election on June 8. With a seemingly unassailable lead in opinion polls, it would take an even bigger surprise than any of the others we’ve seen recently for the Conservatives to fail to get a larger majority as a result of an election, which they will interpret as a stamp of approval on plans for Brexit. That, in turn, is perceived as enhancing the UK’s negotiating position and has flushed out sterling shorts which are the last major speculative position left in the FX market.

I’m not sure how much further the euro can rise this week ahead of the first-round vote in France, though yield moves, economic trends and even opinion poll trends in France all support the idea of being long euros after the event. That’s not going to be comfortable if we break clean through EUR/USD 1.08 this week but I can’t really believe we’ll avoid a wobble.

Asian equities were lower for the most part while European stocks managed to shake off extreme political uncertainty to rebound from yesterday’s slump.

  • Topix down 0.01% to 1,471.42
  • Hang Seng Index down 0.4% to 23,825.88
  • Shanghai Composite down 0.8% to 3,170.69
  • Sensex up 0.05% to 29,333.48
  • Australia S&P/ASX 200 down 0.6% to 5,804.01
  • Kospi down 0.5% to 2,138.40
  • FTSE 7137.66 -9.84 -0.14%
  • DAX 12029.14 28.70 0.24%
  • CAC 5005.65 15.40 0.31%
  • IBEX 35 10336.80 72.30 0.70%

We got some commentary from OPEC Secretary General Mohammad Barkindo overnight that’s worth noting. Here are the bullets:

  • “We are working hard to minimize those variations” in how OPEC measures compliance with output cuts
  • NOTE: OPEC bases compliance with cuts on production estimates by third parties known as secondary sources, as against from producers themselves
  • Already starting to see closing gap between country reporting and secondary sources
  • OPEC, other producers in agreement to cut output are committed to bring down oil stockpiles
  • All countries in deal are committed to restore stability to oil market
  • OPEC has positioned itself to dictate events, not react to market
  • OPEC, non-OPEC taking lead for market rebalancing
  • Will decide whether to extend cuts on May 25 depending on reports from compliance committee
  • OPEC trying to work closely with shale oil producers

That comes on the heels of industry data that disappointed bulls on Tuesday afternoon and ahead of EIA data due this morning that will either confirm or refute API’s smaller than expected (840k bbl) crude draw and surprise gasoline build (+1.37m bbl).



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