Credit – The ECB’s corporate sector purchase programme made a very promising start, consistent with our base case that purchases will total around EUR 7.5 bn per month. The total announced purchase amount of EUR 348 mln only covers last Wednesday’s purchases, as settlement requires 2 days. This also means that all purchases were carried out in the secondary market as the ECB’s participation in a new issue was subsequent to that. The relatively high amount also has a symbolic function as it shows the ECB was determined not to disappoint the market at this stage. Scaling up the first day purchases to 20 working days (20 days * EUR 348m) would lead to a total monthly amount of EUR 7bn.
Government bonds – Global government bond yields have fallen sharply in recent weeks, with 10y Bund yields hitting record lows. We have lowered our projections of government bond yields in the US and eurozone. During the rest of this year we expect yields to move gradually higher, but to remain at historically low levels. Bonds should be supported by the Fed remaining on hold, the ECB stepping up QE and weak underlying inflationary pressures. We now expect 10y Treasuries to reach 2% and 10y German bonds to move to 0.20% at the end of 2016. Our base case scenario assumes no Brexit, if there were a Brexit, yields would instead fall further. Please see our note here for further details.
FX – Markets have – rightly in our view – become more nervous about Brexit and have built in higher risk premiums. The stress in the FX options market has increased further with even higher demand for downside protection and an increase in volatility. Since the end of May, sterling has fallen by more than 3.5% versus a basket of currencies. In addition, currencies with safe haven attributes, such as the yen, the dollar and gold, have done well. On Monday, sterling remained under pressure for most of the day but recovered in the afternoon. Sterling is currently closely following developments in the opinion polls. As long as the polls remain close, uncertainty will increase triggering more sterling weakness ahead of the 23 June referendum.
Global Macro – China’s latest data are in line with our scenario of an ongoing gradual slowdown, showing that stimulative policies have contributed to a stabilisation of growth while at the same time having failed to trigger a broad-based improvement in momentum. Whereas growth of industrial production (6%) and retail sales (10%) were more or less stable compared to April, fixed asset investment fell from 10.5% yoy ytd in April to a post-2000 low of 9.6% in May. This drop was driven by ongoing weakness of private investment, with state-led investment (particularly in infrastructure) holding up much better.