Friday May 8, 2015 - 23:38:31 GMT
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European Bond Market Revolt: Week Ahead
By John M. Bland
Extreme Volatility in 10-yr Bund
The past week saw what appeared to be a revolt in European bond markets to the Quantitative Ease program (QE) program in the Eurozone. I do not know specifically what triggered it, but a short squeeze in the bund market developed that spilled over into global bond markets, which have become tightly interconnected. Even though the European Central Bank is in the midst of executing an aggressive policy of government bond purchases to drive interest rates lower. The 10-yr German bond yield rose from 0.04% three weeks ago to a peak of nearly 0.80% early on Thursday. The sudden and completely unexpected spike higher in German rates resulted in a sharp move higher in the EURUSD forcing many shorts to rush for cover. The short squeeze in German bunds had eased by mid-morning Thursday in New York. This saw bund yields fall along with the EURUSD. Major damage has been done again to the bull USD scenario.
U.K. Election Surprise
U.K. elections are notoriously unpredictable. Thursday saw the Conservatives returned to power in what was expected to to be the closest vote in recent memory. No one had been calling for a Conservative majority, albeit small. Some sort of a coalition had been widely expected. The result is seen as positive for the British pound and U.K. markets.
April U.S. Jobs figures Disappoint
Financial markets were disappointed by the U.S. jobs figures on Friday. Most were expecting a strong rebound from the +126K gain in March, the March figure was revised down to a gain of only +85k, Even though the headline figure of +223K was in line with Street estimates. What's more, average hourly earnings grew only by 0.10% in the month. That was below the +0.20% estimate. The Fed would like to see higher wage rates to justify an interest rate hike. The odds for a Fed rate hike have been pushed out to September at the earliest because of the slow economic recovery .
The upcoming week is an active one for data.
-- Monday, May 11 features the first Bank of England policy decision after national elections.
-- Tuesday May 12, sees key industrial and manufacturing output data from the U.K. The U.S. will release one of Fed Chair Yellen's preferred employment statistics, the JOLTS Survey.
-- Wednesday May 13, features U.K. employment data, and the quarterly Bank of England Inflation Report. The European Central Bank will release its latest policy meeting minutes. U.S. Retail Sales data are always a closely monitored statistic. A 10-yr auction is due as well.
-- Thursday May 14, will feature a number of European closures due to the Ascension Day holiday.
-- Friday May 15, sees the Empire State PMI and the May preliminary University of Michigan Sentiment Survey.
Be sure to refer daily Global-View to see the continuously UPDATED Economic Calendar and the Forex Forum for the complete list of key items (actual data, selected charts, etc.) as they are released.
John M. Bland
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