Market commentary: European bonds and the equities rebound

Thursday proved to be a good day for equity markets that finally saw solid daily gains after declining throughout the first half of the week. European stocks posted a resilient rebound with the German Dax gaining 1.84%, the French CAC 40 adding 1.36% and the Euro Stoxx 600 Index advancing 0.64%. US equities followed suit bouncing back to the level seen last Friday after the positive jobs report’s release. The S&P 500 added 1.08%, while the predominately technology based Nasdaq Composite jumped 1.39%. 

Among best performers was Facebook that closed the session 3.74% higher after JPMorgan issued a positive note prizing the social giant’s “impressive” engagement data and confirming the stock as one of JPMorgan’s top picks for 2015. Gilead Science also outperformed the market and the Nasdaq Biotechnology Index by gaining 2.21%, hitting a six-month high at $108.74.

In Europe, investors were somewhat reinsured by the speech delivered by ECB’s President Mario Draghi to the IMF on Thursday, when the central banker reiterated its commitment to QE stating that the ECB does not intend to cut its monetary easing program short.

In addition to the bonds’ purchasing program the European Central Bank will continue to keep interest rates in the zero region and impose negative deposit rates in an attempt to support a so much needed recovery and encourage the banking system to resume lending to the Small and Medium Enterprises which are Europe’s economic backbone.

Mr Draghi also insisted that the ECB’s asset-purchase program is working according to plans and it is beginning to translate into better economic data: citing the Eurozone inflation snapping out from its four-month declining trend and continental Europe economies posting encouraging signs of positive GDP expansion.

On the flip side, European sovereign bonds’ yields, which had dived towards zero and below in the first four months of the year, have substantially corrected over the past month or so, prompting some investors to doubt their early choice to buy into Europe’s government papers.

Some analysts are also starting to map a “duration realignment” caused by investors exiting longer dated maturity, preferred choices in the initial hunt for yield, and repositioning their investments within shorter term sovereign bonds.

A confirmation of this “shift” along the yield curve can be found in the widening spread between 30 Years German Bunds and the 2 Year German Bunds which used to be around 71 bps as recently as April 20th, and that reached 164 bps on Thursday.

The large number of purchases in the long dated maturities, which were bought in high volumes since the formal QE’s announcement on January 22nd and had contributed to flatten the European government bonds’ yield curves much quicker than the market had anticipated, are now being sold off aggressively, with traders re-entering the market throughout purchases of shorter terms papers.

While European sovereign bonds gained at the opening of trading this morning, the Euro, which have been appreciating over the past four weeks returning close to the 1.14 level against the Dollar, paused its rally declining 0.30% this morning, down 0.60% from its one-month high recorded yesterday.

This article was issued by Paolo Zonno, Trader/Analyst at Calamatta Cuschieri. For more information visit, information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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