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Video / 27 October 2016 at 7:11 GMT

From the Floor: Bonds close in on post-Brexit highs

#SaxoStrats
  • Global bonds selloff gathers pace to push yields higher — Moltke-Leth
  • Federal Reserve rate hike for December priced in at 75% — Moltke-Leth
  • Bunds retesting post-Brexit highs — Boye
  • 10-year German bund yield closing in on 0.10% — Boye
  • Italian referendum fears increase investor jitters — Boye
  • Nintendo shares slip another 4% — Moltke Leth
  • Samsung takes 17% Q3 income hit after model withdrawal fiasco — Moltke-Leth

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By Martin O’Rourke

The global bonds selloff gathered pace overnight to take 30-year US Treasuries to a year high after the outlook for a Federal Reserve interest-rate move in December jumped to 75%.

The Bloomberg Dollar Spot Index hit a seven-month high after home sales and services activity gave the green light to a bit of dollar flexing although that proved relatively shortlived. At 0655 GMT, EURUSD was at 1.0902, USDJPY at 104.64 and GBPUSD at 1.2212.

“There was some very healthy data overnight and dollar has also been supported by this trend of rising Treasuries’ yields,” says Christoffer Moltke-Leth, from Saxo Bank’s Singapore hub. “In the UK, there was a pretty massive jump in yields of 8 basis points.”

Even that bastion of tortoise-like solidity and forward progress, Japanese government bonds, was feeling the downwards pressure, says Moltke-Leth.

US 10-year yields breaking higher
v
 Source: Bloomberg

“Core yields are on the rise again which in part can be explained by a load of new supply,” says Michael Boye, from Saxo Bank’s fixed income desk in Copenhagen. “Bunds are retesting the post-Brexit highs, and that has helped push the German 10-year yield back towards 0.10%.”

German bunds are encountering some technical resistance at 1.63, says Boye.

German-speaking neighbor Austria then, could hardly have picked a worse time to launch a long-duration government bond after it issued a 70-year bond for maturity in 2086 at 1.5%.

“If the bond yield was to jump 1%, then this alone would have cost it a couple of full points following yesterday’s move,” says Boye. “But if you believe in a narrative for a rebound to lower yields for bonds, then the pendulum would swing the other way and could make this bond a great bet for that play.”

German 10-year at post-Brexit highs
j
 Source: Bloomberg

Italy shakes

Anti-establishmentarianism is fully out in force again and, while we might be inclined to focus all our intention on that battle across the pond, Italian investors are getting increasingly jittery too as Italy draws closer to its December 4 referendum on constitutional reform.

While this not a referendum on EU exit in the sense that the UK vote in June was, it is becoming a proxy for such an outcome as a defeat for prime minister Matteo Renzi would open the door for a fresh election and a shift to the extremes.

“Italy is getting very jittery, and we have seen the yield very near a year-high in absolute terms near 1.5%,” says Boye. “It would not be a surprise at all to see a ‘No’ vote on the anti-establishment wave sweeping across the western world.”

Italian jitters over the referendum are seeping into the bonds market 
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Source: Bloomberg

Shares gloom

Two giants of Asia which have rarely been out of the news for differing reasons reported overnight. Poor Nintendo must be wondering what it needs to do after a further 4% fall in the share price took it down over 10% overall since it introduced its new gaming platform last week.

“Nintendo scored such a huge success with Pokemon Go over the summer, but it only actually added $115 million to the bottom line,” says Moltke-Leth. “It has slashed expectations for the next quarter.”

South Korean giant Samsung meanwhile reported a 17% decline in earnings as the anticipated hit from the Galaxy Note 7 fiasco wormed its way into results for the third quarter.

“Samsung is down of course, but its mobile segment still earned won100 billion even if this was down from won2.4 trillion on the previous, and we shouldn’t forget that the share price is still 24% up for the year,” says Moltke-Leth. “Samsung says it is going to focus on getting its new products to market so that is can compete with Apple.”

And finally…

There are some very big guns reporting over the next 48 hours, including Google, Amazon and a number of the major Chinese banks such as ICBC and Agricultural Bank of China. Keep your eyes peeled!

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 Well, if Renzi wants a 'Yes', I'm voting 'No'. Photo: iStock

Martin O'Rourke is managing editor at Saxo Bank

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