US And German Spread Highest Since 2000
James Woods | Feb 20, 2017 10:40
Originally published by Rivkin Securities
The spread between German and US yields is now sitting at the highest levels since 2000 highlighting the continued divergence between monetary policy and political uncertainty ahead of key European elections in 2017. The first chart below shows the spread between the German two-year securities, with German instruments the benchmark for European debt, against two-year US treasuries. The gap has now widened to +2.017% while the measure of the spread on ten-year securities is currently at +2.128% modestly below the late 2016 high of +2.313%. The difference reflects the divergent monetary policies, with the Fed striking a more hawkish tone recently while the ECB has reaffirmed it intends to continue with its current QE program until December 2017.
The markets have a strong aversion to uncertainty, and Europe has plenty of political uncertainty in 2017. Both Brexit and Trump’s recent victories are fresh in investors’ minds ahead of key elections in the Netherlands, France and Germany as well as the ongoing Greek bailout saga. While these elections will be the focus for headlines in the next few months, once they are out of the way attention will return to the improving economy and company earnings with fourth quarter earnings on track for +12.6% growth year-on-year. Importantly recent growth and inflation is not yet strong enough to suggest the ECB will begin to taper back their stimulus. That will help keep bond yields low increasing the bullish case for European equities as investors look to put their money to work.
The euro weakened -0.57% against the US dollar, boosting the dollar index by +0.46% given the heavy weighting towards the euro. The pound slipped -0.6% following disappointing retail sales for January as weaker wage growth coupled with inflation begins to weigh on consumer spending. The weaker pound boosted the FTSE100 +0.30% given the high levels of overseas earnings for those constituents. Elsewhere equity markets were mixed, in Asia equity markets saw some profit taking with the Nikkei 225 -0.58% lower, as was the S&P/ASX 200 (-0.18%) and Hang Seng (-0.31%). In mainland Europe the DAX finished the session flat and the Euro Stoxx 600 was modestly higher, up just +0.03%. In the US both the S&P 500 and Nasdaq 100 gained +0.17% and +0.4% respectively.
Oil prices remained within a tight consolidation range shown on the second chart below. The market remains within a delicate balance as increasing US production weighs on the OPEC production cuts. The number of active US oil rigs increased to 597 for the week ending February 17th, up from the May 2016 low of 316. From here prices are likely to continue to remain within their well-defined trading range, with production cuts keeping a floor at $US45 while US production should keep prices capped below the low $US60 region.
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This morning we can expect a slightly stronger start to trading with ASX SPI200 futures finishing trading +5 points higher on Friday.
Chart 1 – US 2 Yr – German 2 Yr Yield
Chart 2 – Brent (Blue) & WTI (Purple) Crude Oil
Source: Rivkin, RivkinTrader
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