Panic in the bond market continues for a fourth day today, with yields shooting to new yearly highs again this morning. This bond rout is dragging European and US stocks lower today, despite upbeat first-time jobless claims in the U.S.
Both stocks and bonds in Europe are feeling pressure from Greece’s rejection of the “final” plan put forward by creditors, and heavy fighting breaking out in Ukraine, where at least 24 people have been killed in the last 48 hours.
Gold and oil are lower this morning, with WTI back under $60/bbl, and spot gold breaking through the $1,186 support level to trade near $1,175.
Yesterday in the Markets
German bunds hit six-month lows yesterday, pulling Treasuries, British gilts, and French bonds down as well. ECB president Mario Draghi didn’t help matters by telling markets to “get used to volatility” going forward. The yield on the Spanish 10-year bond jumped 14 basis points in less than an hour yesterday, underscoring the panic as investors scramble to dump bonds with near-zero yields as the EU shows a sudden exit from deflation. The 10-year Treasury note tanked yesterday, with the yield jumping to a seven-month high of 2.36% The yield on the German 10-year bund ended at .88%, the highest since last November.
The dollar was hit again by a continued rally in the euro, which eased from session highs to settle at 1.127. This brought the DXY dollar index down a half percent for the day.
The Fed Beige Book reported “modest to moderate” growth in most of the U.S. for the period of early April through late May, helping stocks record modest gains for the day yesterday. Bank stocks helped lift indices, as higher bond yields means that they can charge higher interest on loans.
A new rebel offensive in Ukraine exploded near Donetsk on Wednesday, as pro-Russian separatists used tanks and artillery to assault a strategic village in the area. Reports have been circulating the last week or two of eyewitness accounts of Russian tanks and AFVs scrubbed of all identifying marks being stockpiled in depots on the Russian/Ukraine border. Apparently, these arms are now in rebel hands, and are part of the new offensive.
Spot gold pushed down to the $1.186 support level in early afternoon trading Wednesday, hitting a four-week low despite the weaker dollar, as the Fed beige book report and a robust private payrolls report boost odds of a Fed hike in benchmark interest rates in the next six months.
Factors Affecting Gold Today
The bond sell-off continues unabated for a fourth day this morning, as investor scramble to find virtually non-existent buyers to dump their holdings. Even though German markets are closed for a holiday, bund yields continue to climb. At 10am, the yield on the 10-year bund was .93%, and the 10-year T-note was yielding 2.32%. The rout is so bad, that traditional safe havens such as gold and the Swiss franc are being ignored in the panic.
How bad is this week-long meltdown in global debt? The #1 trending topic on Twitter this morning is #bund.
A downturn in global equities markets pulled Wall St to a lower open, but reports that first-time jobless claims fell by 8,000 applications to show 276,000 people losing their jobs last week helped the market recover some of the lost territory (but still remained in the red at 10am.) The four-week moving average of first-time unemployment claims rose by 2,750 to 274.750.
U.S. stocks were also helped when IMF President Christine Legarde implored the Fed to not raise interest rates until the first half of next year. The hopes of near-zero interest on borrowing probably helped stocks more than the jobless report.
Euro stocks got hit today with the one-two punch of the bond crash, and the socialist government in Greece rejecting what was billed as the “final offer” from creditors. Leftist prime minister Alexi Tsipras told European markets “don’t worry,” that Greece would make tomorrow’s bailout payment to the IMF, but the markets are not believing it. As the Greek government’s coffers run dry, unemployment in the battered nation was reported at 25.6%.
The dollar was smashed at 4am Eastern Time by a strong euro rally that took the common currency to over 1.135, but the exchange rate has normalized a bit to let the greenback recover to slightly below yesterday’s close.
Heavy fighting continues in Ukraine, with no signs of letting up. Russian president Vladimir Putin has little to fear regarding more economic sanctions from the EU over this new outbreak in hostilities, because sanctions must be approved unanimously, and Greece wishes to curry favor with Moscow as a back-up plan (or card to play) in debt negotiations with its European creditors.
OPEC meets tomorrow, and rumors swirl that not only is a decrease in production not on the table, an actual increase in production is contemplated. Iraq has announced that it will be stepping up production to pay for the war against ISIS Sunni terrorists, and Iran is itching to get back into the market at the conclusion of a nuclear reduction agreement which will lift trade sanctions.
The non-farm payrolls report for May will be the big market mover tomorrow, with consumer credit in the U.S. also having an effect.