From Marc to Market:
The US dollar is little changed
ahead of what will likely be a thin North American session due to the US holiday
on Monday. The Australian and New Zealand dollars are attracting
flows, ostensibly as a place to park funds, even though tomorrow's Australian
election looks a dead heat.
Falling yields
seem to be offsetting the rise in equities as a driver for the yen, which is
the strongest currency today, gaining 0.6% against the dollar. The greenback was turned lower after making a
marginal new high for the week in Asia near JPY103.40. A break and
close below yesterday's low (~JPY102.35) would be bearish technical
development.
Most bond
yields are lower, with the US 10-year yield off four
bp to 1.41% a new low. European bond yields are mostly
lower as well. Talk that the ECB is considering moving away from the
capital key determinant of its sovereign bond purchases to a debt-weighted is
helping depress yields. The idea is that given the further decline in
Germany yields post-Brexit, many Germany bunds no longer qualify.
The ECB's rules
prohibit buying bonds with yields less than the deposit rate. This
now excludes Germany bunds out seven years. Also, the fact that
the premium over Germany widened may also be of concern to the ECB.
However, to buy based on the size of the debt market would mean the ECB would
accumulate bonds of the largest debtor (Italy) and the surplus countries are
likely to balk on grounds that it will lead to a deterioration of the quality
of the ECB's balance sheet. It will become a bad bank.
Separately the
EU agreed yesterday to the Italian government providing as much as 150 bln euro
liquidity guarantee for Italian banks if
needed. This might make it easier for Italian banks to sell bonds, but to boost core capital, this is unlikely to
prove sufficient. Moreover, there needs to be stronger incentive to
restructure the industry. There is also some talk of increasing the size
of the Atlas Fund, the privately
financed backstop. We still think there is scope to increase the role of
Italy's development bank CDP....MORE
