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European bond and stock markets remain unnerved

Careful now!

European bond and stock markets are calmer but there is a notable lack of a meaningful rebound after the yesterday’s heavy selling.

  • German 10-year Bund yield extends 18-month high
  • Euro holds $1.14, region’s equities are flat
  • Asian stocks fall, S&P 500 ends 0.9 per cent lower
  • Brent crude down by over 1 per cent as its recovery cools

Investors’ move away from sovereign debt — in anticipation of the reduced stimulus spending from the European Central Bank — is continuing to lead sentiment across markets, leaving a nervous feel to muted trade.

There is a notable lack of a rebound on bond and stock markets after the previous session’s heavy selling.

The 10-year German Bund yield up 1 basis point at 0.57 per cent, extending its 18-month high of 0.56 per cent during the previous session. Stock markets are in neutral gear and the euro is slipping back after its run higher leaves it looking tired.

Italian 10-year yields are up 1 basis point at 2.274 per cent, while the yield on the equivalent debt in France and Spain is holding steady around the highest level since April. Yields rise when prices fall.

The trading pattern follows minutes from the ECB’s last policy meeting which revealed a discussion on the possibility of dropping its pledge to stand ready to increase stimulus if needed.

Removing its bias toward further easing would be the first step on the road to the actual reduction of stimulus. Policymakers signalled at the June would not cut interest rates any further.

The prospect of the beginning of the end of the ECB’s €60bn monthly bond buying is being felt beyond the eurozone, in wider global capital markets on equity and currency markets.

The yield on 10-year Treasury, which moves inversely to its price, is up 2 basis points at 2.384 per cent.

The dollar is finding support after it came under pressure following the publication of the Federal Reserve’s June policy meeting. They showed a lack of consensus on how the US central bank will go about reducing the size of its balance sheet, swelled by its own stimulus spending.

The index, tracking the US currency against a basket of peers, is up 0.1 per cent at 95.874.

The euro is down 0.1 per cent at $1.1414, having risen 0.6 per cent over the previous session. The pound is also 0.1 per cent weaker at $1.2951.

The Japanese yen weakened to an eight-week low, falling 0.4 per cent against the dollar to ¥113.65 after the Bank of Japan increased its purchases of Japanese government bonds.

The Euro Stoxx 600 is down 0.2 per cent as is the FTSE 100. The Xetra Dax 30 is down 0.1 per cent,

Japan’s Topix index is down 0.5 per cent as the industrials sector fell 0.5 per cent and the consumer staples segment lost 0.6 per cent.

Hong Kong’s Hang Seng is 0.3 per cent softer The Shanghai Composite is down 0.2 per cent.

Oil prices are lower, taking no heart from data showing US crude and gasoline inventories fell sharply last week. Crude stocks fell 6.3m barrels, the largest dip in a month and gasoline inventories fell 3.7m barrels.

International benchmark Brent crude is off 1.2 per cent at $47.53 a barrel. West Texas Intermediate, the main US contract, is also down 1.2 per cent at $44.96 a barrel.

Brendan Mulhern, global strategist at Newton Investment Management’s Real Return team, says:

The markets remain in thrall to the coquettish suggestions of central banks as they continue to publicly flirt with the prospect of removing monetary stimulus.

It appears that the mere prospect of a less dovish ECB has been sufficient to prompt the markets to reassess the prospects for bonds. The problem now facing central banks and market participants is given that central banks are now the largest players in their respective bond markets, how do they step away without sending the market down?