US yields ease as European debt concerns trigger safety inflows

00:00:00: US yields eased yesterday as attractive valuations and concerns about the European sovereign debt drew investors toward U.S.

00:00:07: treasuries, while the U. S. dollar strengthened at that same time.

00:00:11: Now France's widening yield spread over Germany signals weakening confidence in its fiscal outlook and latter has brought their implications on the euro- and european equity and bond markets On other side of Atlantic Ocean, safe haven flows could eventually help stabilize US bond market and support equities, while investors will also seek direction in the latest US jobs figures due before week-to-week closing bell later today.

00:00:38: So welcome!

00:00:39: This is Swiss Coats Daily Market Talk is Friday, second of October.

00:00:44: I'm Ipeco Skardishkea.

00:00:45: We'll talk about a lot of matters as usual but before we do please keep in mind that opinions are my own And this not financial advice.

00:01:03: US yields finally eased yesterday.

00:01:05: It was partly as the sharp sell-off that we saw in weeks preceding, and now attractive yields tempted buyers back into US treasuries but more importantly mounting concerns about European debt especially French debt incurred a flight to safety and the US dollar gained sharply at that time.

00:01:25: That may sound contradictory, but both moves tell exactly same story indeed.

00:01:30: Investors were looking for shelter yesterday as this situation could continue because buying treasuries pushes their prices higher lower.

00:01:40: While demand for US alert-nominated assets supports the green bank and on the other hand higher European yields hardly make the euro more attractive when they reflect growing doubts about government's ability to manage their debt.

00:01:54: you get a higher yield Yes, but you also get a bigger headache.

00:01:58: Now we could argue whether the US debt is safer than other so-called DM debts But the jaw dropping spike that we see in French German ten year yield today to pass one hundred and forty basis points which was the highest since May.

00:02:12: two thousand twelve Which were the euro area sovereign debt crisis mind you got investors scratching their heads naturally.

00:02:19: now The question is why is this?

00:02:21: So bad?

00:02:22: it's all about?

00:02:22: because it raises the uncomfortable Question of How much France must pay to convince investors of finance instead?

00:02:30: And while high-embarbing costs make an already difficult budget equation harder to solve for the French, while political uncertainty makes suspending cuts and reforms needed to restore confidence are harder to deliver.

00:02:43: If you're not familiar with french politics or the far right national rally some people don't like to call it that way as a party changes its name daughter Le Pen, helping it to become somehow more mainstream.

00:03:00: But National Rally stands at the far right of the French political spectrum and this is not my interpretation.

00:03:07: so anyway The national rally has been gaining field And their fiscal program Is very far from anything you could call discipline.

00:03:13: I mean This is now a political show.

00:03:14: i'm just stating the facts.

00:03:16: And therefore, we see a sharp weakening in appetite for French debt and the latter is a big issue for the broader euro area and the Euro itself.

00:03:24: Because France isn't just any country in the Euro-area it's Euro-areas' second largest economy.

00:03:29: We used to call it the core along with Germany back in two thousand eleven, two thousand twelve sovereign debt crisis remember?

00:03:37: So if concerns spread other heavily indebted members could also face higher barbing costs and later would tighten financial conditions across the region more than it should.

00:03:48: For the euro, that means weaker growth prospects and a growing risk

00:03:51: preview.".

00:03:52: The Eurodollar tanked to one-twelve-fifteen level yesterday as market has somehow stopped pricing the central bank convergence divergence story because latest inflation figures were actually high enough support.

00:04:06: European Central Bank hogs have now started pricing the euro area sovereign debt story compensation to hold vulnerable countries dead, although we should note that German bonds could benefit from the same flight-to-safety than the US even though the fiscal spending there is growing as well.

00:04:25: Analero comes at worst possible time when Euro area grapples with energy crisis rising inflation in a hawkish European central bank outlook!

00:04:33: A too rapid depreciation of euro in this situation can make matters worse for the EU by increasing price pressures through imported inflation, that's something that the European Central Bank does not want to happen.

00:04:48: And for stocks it means agitated waters ahead during the sovereign debt crisis.

00:04:53: back in two thousand eleven twelve this sucks six hundred loss roughly a quarter of its value between February high and late September before recovering some ground later on.

00:05:04: As such, sovereign debt concerns can do much more than shake the bond market only.

00:05:08: They can seriously damage equity appetite too and this is partly why the SOC-Six Hundred tanked nearly one point thirty percent in yesterday's trading session as oil and gas prices rose in tandem while lira weakened making price rises across energy sectors even higher for Europeans.

00:05:27: There a question that I start hearing very often now… Is France The New Greece?

00:05:31: Well be careful with that comparison!

00:05:34: because French economy and bond markets are much larger than Greece's.

00:05:38: And the euro area has stronger crisis management tools today, then back in the Euro-area sovereign debt crisis.

00:05:45: yet mechanism is obviously familiar.

00:05:48: doubts about that sustainability push yields higher and higher yields make the debt harder to manage funds and hedge funds who are trading the turmoil could also amplify the moves that we see in market prices without providing stable long term.

00:06:03: So we can say that France is hardly Greece, but the confidence problem is real.

00:06:07: The volatility is real.

00:06:08: as such We will continue to watch developments in the euro area sovereign debt market very closely But In the meantime... In these conditions, and given how the attention of the dominant market driver is shifting towards the euro area sovereign debt issues.

00:06:39: The US jobs data you later today may lose its market moving force.

00:06:43: It will be closed by global investors before the weekly closing bell but price moves could Otherwise, now that we have a bigger subject and big headache on the wire.

00:06:55: Now speaking of US jobs.

00:06:57: still earlier this week ADP printed hired an expected figure.

00:07:01: yesterday additional data show hiring intentions in the U.S were muted but job cuts also fell nearly twenty percent compared to year ago.

00:07:09: then weekly data showed initial jobless claims in United States felt lowest level since July and continuing claims with three years low.

00:07:19: In summary, the US jobs market appears to be gently recovering from earlier weakness while short-term inflation risks remain tilted to upside due to persistently elevated energy prices.

00:07:31: That means that the Fed is likely deliver another rate hike before this year ends and likelihood of action will be higher with robust jobs data.

00:07:43: Now looking at numbers, the US economy is expected to have added around eighty nine thousand new non-farm jobs in September.

00:07:51: according to a consensus and Bloomberg survey The wages may have grown as an unchanged speed of point three percent month on month compared here months earlier And unemployment rate has seen unchange at four point one per cent level.

00:08:04: now thinking Is always the same?

00:08:06: A set of strong payrolls boost the hawkish fed expectations and latter with pressure, shorter end of U.S.

00:08:15: yield curve higher while softer numbers could have the exact opposite impact.

00:08:20: but unless we see a big surprise in numbers today say an fp print below zero or above two hundred thousand the longer end of the us yield curve could continue to ease as safety demand comes front and correction gains momentum.

00:08:34: so i would say that in the absence of other major news today you can see the u.s equity market has catched a bit off a tailwind from lower longer maturity yields while appetite for european equities will be harder.

00:08:48: prices are rising and the euro sovereign debt worries are taking their headlines.

00:08:53: So this is all for today's week, I'm Ipeko Skardesh Kaya And thank you for joining me!

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