The German 10-year bund yield following an early-Friday-morning spike hovered between -0.14 to -0.10 percent range on Monday, which should prevail for short term basis in quiet trade. A downward bias comes from UK spillover as well as US 10-year Treasury yield trading below 1.50 and having tested their record lows from 2012 during Friday.
The 10-year Treasury-note/Bund yield spread has narrowed to 4-month lows in the mid-150s. Regarding ECB policy, a source report came out on Friday contradicting the one the previous day saying the governing council is considering adjusting its QE allocations in favour of the higher-yielding countries with greater debt stocks (i.e. Italy).
It's not clear whether the ECB will in fact take such a controversial decision as soon as its July ECB meeting, but it seems likely to happen at some point. In any case, BTPs didn't reverse their outperformance, with the 10-year Italian/German yield spread in the mid-130s, the narrowest in a week.
Meanwhile, the yield on the benchmark 10-year bond rose 1/2 basis points to -0.121 percent, yield on super-long 30-year bonds jumped 2-1/2 basis points to 0.419 percent and the yield on short-term 2-year note dipped 1 basis point to -0.659 percent by 09:30 GMT.
Moreover, the Bundesbank President Weidmann said that he sees no need for further policy easing in response to Brexit; monetary policy cannot address political uncertainty. Even though Weidmann is hawkish, we don't see any immediate ECB policy action yet either; the central bank will monitor the fallout over the coming weeks/months. We do, though, continue to look for a final 10 basis points deposit rate cut in September. And more easing may well come if economic prospects markedly deteriorate.
Apart from this, Germany's Finance Minister Schaeuble said that Germany wants national governments to set the pace for future cooperation within the European Union and they should sidestep the European Commission in Brussels if needed.
The Brexit reality has pumped in a lot of uncertainty over sustained co-operation within the currency bloc. Schaeuble’s comments outline the emerging response from Chancellor Angela Merkel, whose government fuelled last month’s UK referendum, resulting in Britain’s exit from the premises of the European Union. Further, it signals a looming clash with advocates of EU integration such as European Commission President Jean-Claude Juncker and those governments that view German-led budget rigor in the euro area as holding back growth and jobs, Bloomberg reported.
In terms of data, the Sentix Eurozone investor confidence indicator for July fell to 1.7 from 9.9, undershooting expectations of 5.0. This is the lowest in 1-1/2 years. The Current Conditions component dropped less to 5.5 from 9.8, while the expectations measure fell to 2 from 10. Such deterioration in sentiment is not surprising in light of the UK's referendum, and will inevitably manifest itself in forthcoming surveys.
On Friday, the BoE's governor Mark Carney said the central bank will probably have to ease policy over the summer and the referendum implications for the UK economy are not yet clear, but a 'material slowing' is now the BoE's central forecast.
He further added that uncertainty could remain elevated for some time and have more persistent drag on activity. He also sees risk of tighter financial conditions and of spillovers to other economies. This suggests that a 25 basis points bank rate cut to 0.25 percent can be expected during the August 4 MPC meeting.
The ECB is not currently considering altering its bond-purchases to deviate from the 'capital key' (i.e. based on the economies' size in favour of their outstanding debt); there would be a 'high hurdle' for doing so and other changes would be considered first — including raising the limits on individual bond purchases.
This is according to unidentified ECB sources cited by Reuters, contradicting another report on Thursday. On balance, it seems to be a close call whether a controversial change will be agreed, and if so whether it would be announced as soon as at the July ECB meeting. But it seems likely to be adopted eventually, considering ongoing QE and dropping bond yields.
Meanwhile, the US markets closed for the Independence Day holiday, the German stock index DAX Index fell 0.26 percent at 9,752 by 09:30 GMT.
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