The flight to safety has never been more prominent, with record low yields in Germany, US, UK, Finland, Holland, Australia; we could go on, but it is certainly clear the capital preservation trade is in full force.
Breaking this down, German two-year bunds are now trading with a negative yield for the first time, highlighting that investors actually have to pay the German treasury money to hold their funds. It can also be seen in the forex space with EUR/USD once again getting no attention, trading down to 1.2362 where the selling seems to have paused (for now).
Our technical targets have and will remain the June 2010 low of 1.2152 ahead of 1.1877, and we feel traders may look to accumulate new shorts on bounces to 1.2450. There was a brief pop in the pair in European trade when the EU commission suggested that direct bank recapitalisation via the ESM might be ‘envisaged’ and that the eurozone should move towards a ‘banking union’. However, after the move traders decided these comments did not justify the bounce and that we would ultimately need to see treaty changes, which, given the German, Finnish and Dutch stance, seem a long way away.
An Italian bond auction was also a source of concern after it failed to get the full €6.25 billion away, with yields on its ten-year moving above 6% again. Spanish yields also went through the roof, with the ten-year bond trading as high as 6.72%, up from yesterday’s close at 6.47%, whilst the two-year soared 40 basis points. The issue with Bankia has now got traders questioning not only how Spain is going to bailout the banks, but also, who’s going to bailout Spain; the record levels on Spanish credit default swap (cost to insure against default) have blown out to record levels.
It is also worth highlighting that the overnight Greek polls suggested it is once again neck-and-neck and are giving no clear indications on a preferred party. Traders will be looking at the German unemployment rate (expected to be unchanged at 6.8%), whilst in US trade we will be watching the ADP employment change, weekly jobless claims and Q1 GDP, which is expected to be revised down to 1.9% from 2.2%.