Market commentary: European stock and bond markets correction deepens

The global bond rout gathered pace, with Japanese notes and German bunds slipping for a fourth consecutive day after Mario Draghi forecasted faster euro-area inflation and continued market volatility. This year’s gains in global bonds were all but wiped off as the European Central Bank chief triggered a selloff in German bunds, saying price growth in the region would pick up further.

The sell-off has been triggered as the market sentiment at the moment appears to revolve around the feeling that the European economy is back on track and the U.S. economy has stabilised, subsequently resulting in changes in future inflation and interest rate expectations which is dampening prices of assets.

The market appears to be digesting negatively in terms of future asset prices the implications behind Draghi's press conference where he warned investors to expect more fixed income volatility dashing hopes that he would try to calm markets after the recent bond wobbles. He expressed confidence that QE was working in increasing growth and inflation but that it still required full implementation of QE to achieve their objectives.

Somewhat importantly, Draghi said if the objectives were not met in full the ECB could do more if financial/economic conditions tightened. There was also an unsurprising upgrade to inflation forecasts for this year to +0.3% (from 0.0%), while 2016 and 2017 forecasts were kept at 1.5% and 1.8% respectively. Growth is expected to be 1.5% in 2015, before rising to 1.9% in 2016 and 2% in 2017.

European shares declined this morning, the Euro Stoxx 50, an index of the 50 largest companies in Europe is trading lower by 1.75 percent to 3521.24 as of this writing although news that Greece’s premier claimed to be near an agreement with creditors, adding there was no need to worry about an International Monetary Fund payment due Friday.

Yields on 10-year German government bonds climbed 2 basis points to 0.9 percent earlier this morning. Benchmark Treasury notes held losses, with 10-year rates little changed at 2.36 percent. On the local market, Malta Government Stocks also declined in line with European sovereign movements, the 25 year bond (2040) falling 150 bps to 2.46% while the 10 year issue fell to 114.12 on the bid side of the central bank benchmark indications.

Earlier this morning the Shanghai Composite Index plunged as much as 5.4 percent before erasing losses to gain 0.8 percent. The Standard & Poor’s 500 Index hasn’t had back-to-back gains in more than two weeks, and is down 0.8 percent from its May 21 record as investors mull the outlook for higher U.S. interest rates this year.

Data Wednesday indicated service industries expanded in May at the slowest pace in 13 months as orders eased, while companies added more workers in May than the prior month, according to private data, a sign U.S. job growth may be getting back on track.

Looking forward to today, not much activity happening in Europe, with the French employment data out early this morning before we get the BoE meeting around midday. This afternoon in the

US we’ve got more employment indicators with Challenger job cuts for Mayand the latest weekly initial jobless claims data. The final Q1 unit labour costs and nonfarm productivity round off the releases today. The Fed’s Tarullo will be the latest Fed official to speak.

This article was issued by Simon Psaila, Trader/ Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The 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.