Most of the major equity indices were in the red last week, following weaker than expected economic data, most notably weak first quarter GDP data from the US and the UK. The news rippled through financial markets, weighing on the respective currencies, with bond yields moving higher and equity markets lower. European equity markets were among the hardest hit, as the Euro moving sharply higher against the US dollar, not surprising since the big move in European equity markets YTD has been led by the sharp decline in the single currency. The FTSE Eurofirst 300 fell 3.43%, In Asia, Japan’s Nikkei 225 fell 2.50%, while Chinese equities bucked the trend and continued their breath-taking ascent.
The German 10-Year government bond yield spiked higher last week, up 21bps to 0.37%. While it is still a paltry yield for investors purchasing the bond and holding till maturity in 2025, the move did attract attention as the question of bond market liquidity came to the fore again. There is a plethora of factors at play here and while the move higher would be welcomed as part of a reflation of the Eurozone economy, we’re not there yet. Therefore, the move is likely to be short-lived if the European Central Bank continues with their bond purchases, as net supply of German government bonds is to turn sharply negative again in June and July.
Key macro data this week includes purchasing manager index (PMI) reports from around the globe, retail sales from Europe, industrial production and trade balance data from France and Germany. Given the recent weakness in US economic data the key US non-farm payrolls employment report released on Friday will carry even more significance than usual as market participants try to gauge the timing of interest rate hikes. After reporting a surprise drop in exports and imports last month, China’s trade balance report for April will also be in focus on Friday.
On the monetary policy front the European Central Bank Governing council will meet this week, with no change to policy expected. Among other things, Draghi will likely face further questioning on persistently low inflation, the outlook for the Eurozone economy, the impact of the ECB’s asset purchase program on bond markets, and developments in Greece. The minutes from the Bank of Japan’s monetary policy meeting will provide some insight into whether the Bank are considering more aggressive measures, while the US Fed governors are on the speech circuit this week, including Janet Yellen.