Global Market Commentary - week commencing 16th July 2018

After positive news on jobs growth, financial markets were back in ‘risk on’ mode. Concerns over trade tensions with China led to US Treasury yields increasing last week.
A modest increase in the consumer price index suggests inflation is reaching the Federal Reserve’s 2% target. Data also pointed to the yield curve flattening to levels last seen in 2007.

Eurozone

Financial markets received mixed messages from last week’s macroeconomic releases. Overall, industrial production for the Eurozone was positive – rising 1.3% month-on-month and 2.4% year-on-year (vs. expectation of 1.2% and 2.1% respectively).
However, the ZEW index, which captures sentiment on German economic growth was disappointing. An EU Commission report also forecast economic growth of 2.1% for 2018 – falling short of the expected 2.3% – while 2019 growth expectations remained unchanged at 2%.
Minutes from last month’s ECB meeting also confirmed the completion of QE by the end of 2018. It also indicated that interest rates will remain low for the foreseeable future until inflation rises. The ECB’s interest rate guidance led to industry debate about the timing of any future rate hike.
The market’s reaction to the ECB’s minutes was even more dovish than after the previous meeting. Bond yields moved downwards, although there was no direct link between core and periphery bonds.

Auctions

On Wednesday, Germany issued a new Bund (10yrs for EUR 3.2 billion) while Portugal sold EUR 0.95 billion of bonds, maturing in 2028 and 2034.
On Thursday, Ireland allocated EUR 1.25 billion of bonds, maturing in 2028 and 2045. In Italy, the DMO sold EUR 6.5 billion BTPs at 3, 7, 15 and 20 years.