Swiss intervention highlights global woes

An improvement in sentiment was quickly reversed midweek as investors were robbed of the only hopeful event on this week’s economic calendar. The services sector was due a rebound according to onlookers, and it would have matched the pattern woven in other leading nations. In the event the services sector marched in lockstep with the manufacturing sector and is heading for a standstill as the economy appears to be heading back into recession. As the negative data builds higher, investors are heading back into the hills exchanging riskier stocks for the safety of treasury notes and bonds. Earlier in the day the Swiss National Bank flooded its money markets as it tried to weaken the currency serving to defuse clearly escalating signs of a global slowdown.

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Eurodollar futures –An earlier in the day rebound for developed nations’ ISM non-manufacturing index readings ran aground when it came to the turn of the world’s leading economy. The decline in the reading for U.S. service sector activity, which accounts for 90% of overall economic activity, is a huge blow for investors at a time when good news is in short-supply and as yields have slipped to fresh lows for 2011. Eurodollars rallied from session lows and all but erasing losses as the ISM index slipped to 52.7 and its weakest since February 2010. Within the index the employment gauge fell to a three-month low, which meant that an earlier strong ADP report showing a hiring gain for July of 114,000 was quickly consigned to the trash can. Inflationary pressures within the ISM report also eased while companies worked through order backlogs. Treasury futures also back-tracked on earlier losses sending the September contract almost half a point better from the earlier low. The 10-year yield eased to four basis points to 2.57%.

European bond markets –European bond markets were issued something of a reprieve by a surprise relaxation in from the Swiss National Bank. By adding liquidity the central bank eased tension somewhat within the Eurozone and provoked a strong rally in the value of the euro versus the Swiss franc, where the latter has risen to record heights as investors sought protection from collateral damage in the event that a deficit-ridden nation collapses. German bund yields rose in early trading sending the September futures contract lower to 131.43 only for the contract to rally following the dour ISM news from the U.S. The same release across the Eurozone had earlier proved positive with the region’s service providers expanding further according to the July reading, which rose to 51.6. The composite PMI also rose from 50.8 to 51.1. June retail sales also displayed strong consumer activity with a faster-than-expected gain of 0.9% on the month leaving annual sales weaker by just 0.4%.

Australian bills – Bill futures moved firmly into monetary easing territory building on a slump in implied yields following the fact that the Reserve Bank highlighted growing global uncertainties at this week’s August meeting. Adding to the gloom and boosting the probability of a rate reduction was the third decline since March in retail sales. June activity was predicted to rebound from a May slide but in the event contracted again. Yields across the entire government bond market slumped below the central bank’s current 4.75% short-term rate of interest. The 10-year benchmark yield shed another seven basis points to 4.62%.

British gilts – Short sterling futures were trapped within a narrow range confined by conflicting events. On the one hand the PMI services index came out unexpectedly strong when analysts had guessed it might fit with other jigsaw pieces to depict a slowing economy. In the event the service sector popped higher to 55.4 from 53.9. Government bond prices failed to see the cautious side with the September gilt future remaining in positive territory all day long. Earlier the yield again reached a fresh record low and recently traded at 2.715 for a fall on the session of five pips. Adding to the bullish tone was the Swiss intervention through monetary easing, which merely crystalized the glare on rising financial market tension.

Japanese bonds – Ten-year government bond yields slumped to 1% on Wednesday at the start of two-day planning at the Bank of Japan. Finance Minister Noda explained that any aim at weakening the yen would ensure that it achieved “maximum effect” and possibly hints of further monetary easing on Thursday along with a cascade of yen sales to weaken the advancing yen.

Canadian bills – With equity prices and those of crude oil firmly in the doldrums, the diminished prospects of a resumption of monetary tightening at the central bank gave traders reason to load up further on bill futures where implied yields eased by five or more basis points. Futures contracts were catapulted to new highs for this move possibly inspired by the yield curve inversion of its Australian bedfellow and commodity-sensitive partner. The Canadian benchmark 10-year yield earlier eased to 2.62% and now stands above that on the U.S. as panic among investors gathers pace.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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