Will European government bonds continue to push higher?

Will European government bonds continue to push higher?

Will European government bonds continue to push higher?

It took a surprisingly upbeat US jobs report to puncture a seemingly unstoppable rally in European bond markets last week, but many investors are betting that Friday’s sell-off will merely be a pause.

The nomination of Christine Lagarde as the next president of the European Central Bank was cheered by bond investors, who bet that she would prolong an era of very easy money and massive asset purchases.

But eurozone bond yields, which plumbed new depths in many countries after the IMF boss’ selection was announced, snapped back after a strong set of readings from the US jobs market.

While US traders, many of whom were pricing in a hefty 0.5 percentage-point rate cut from the Federal Reserve this month, may have been getting ahead of themselves, the same cannot be said of investors in eurozone bond markets, said Rabobank analyst Lyn Graham-Taylor. Bond yields are likely to resume their march lower on expectations of another round of quantitative easing from the ECB, he said.

“This doesn’t change the big picture. The eurozone is struggling to generate any inflation and more QE is on the way,” he said. “The market hasn’t fully priced in the scale of what’s to come.”

Even so, fading expectations of aggressive rate cuts in the US could also fuel doubts that another round of QE is a fait accompli.

“Restarting QE is not a foregone conclusion,” said Ario Emami Nejad, a fixed income portfolio manager at Fidelity International. “While we have no doubt that the ECB will resume QE if there are signs of deterioration in macro data, European indicators have shown some signs of stabilisation recently.” Tommy Stubbington

Is the yen poised to break out from its tight trading range?

Traders in Tokyo left their desks on Friday predicting a big week for the yen as campaigning begins for elections later this month. The poll — to determine the composition of the House of Councillors, the upper house of Japan’s parliament — could make life difficult for prime minister Shinzo Abe and what remains of his Abenomics reform programme.

After its big wobble in mid-June, when the yen flirted with the ¥106 level against the dollar, it has crawled back down to the ¥108/$ zone — proof, say some, that whatever anyone throws at the Japanese currency these days, it soon trends back into the same ¥108-112 range it has held for the past couple of years. But perhaps not for much longer. In a big call last week, Morgan Stanley revised its dollar-yen projections significantly lower, with analysts now expecting a much stronger ¥102 by the end of the 2019 calendar year and ¥94/$ by the end of 2020.

The call came with a warning that the current environment was “reminiscent of early 2016” when inflation expectations fell faster than nominal yields and the yen tore up from ¥121 to ¥99 in the space of a few months.

Markets will spend the early part of this week testing the implications of that call, said traders. By no means all agree with Morgan Stanley — if the Fed cuts rates twice this year, says NatWest Markets strategist Mansoor Mohi-uddin, the yen is likely to retain its status as a favourite funding currency — one to sell in favour of higher-yielding bets — potentially pushing it closer to the ¥115 level. Leo Lewis

What next for US interest rates?

Investors will be looking for further clues on the future direction of US interest rates when Federal Reserve chairman Jay Powell speaks to Congress this week.

Mr Powell will deliver his twice-yearly monetary policy report to the House Financial Services Committee on Tuesday, followed by testimony before the Senate Banking Committee the next day.

The Fed chairman has already opened the door to the possibility of an interest-rate cut but maintained that the central bank’s decision would depend on the strength of economic data in the build-up to the July meeting, with jobs growth central to policymakers’ objectives. In that sense, Friday’s strong employment numbers should have doused expectations of an early and aggressive move from Mr Powell.

The “most important impact may be in providing ammunition to those at the Federal Reserve who seek to remain on a policy rate pause”, noted Rick Rieder, chief investment officer of global fixed income at BlackRock.

Others agreed. “It will be important to see if Mr Powell lays out on a strong case for near-term monetary easing in his testimony,” noted Ryan Wang, US economist at HSBC. “Although Fed policymakers are generally agreed that global economic risks and subdued inflation bear careful monitoring, a few have recently indicated that it may be too soon to make a determination about rate cuts.” Joe Rennison

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