Over the weekend, news broke that a Saudi Aramco crude facilities were attacked by a drone. The incident caused the longer-dated euro zone bond yields to fall on September 16. Furthermore, poor data released by China also favored the demand for safe-haven assets.
Fresh from hitting six-week highs in the past week, the bond yields are now declining again. This happens amid doubts on how the new stimulus measures announced by the European Central Bank could impact the euro zone’s sluggish economy.
Oil soared to a four-month high on Monday after the attacks in Saudi Arabia sparked supply fears shattering 5% of the world’s production. A majority of these longer-dated core eurozone government bond yields were down 1-2 basis points. Notably, Germany’s 10-year benchmark <DE10YT-RR> fell by 1 basis point at -0.46%.
On the flip side, bund futures gained 22 ticks at the start of Monday trading. According to DZ Bank rates strategist Daniel Lenz:
“The bund futures are slightly up; you can interpret this in two ways. If there is growing uncertainty between Iran and Saudi Arabia, this could trigger haven flows.”
Nonetheless, the fixed income assets could experience increased pressure if investors focus on the rise in oil prices and its probable impact on rising inflation. Furthermore, renewed evidence of the China slowdown also added to the market uncertainty. Industrial production in China grew at its weakest pace in 17.5 years.
Retail sales together with investment gauges also worsened. That reinforced views that China might cut some of its key interest rates this week. If the cuts happen, it would be the first time that the Asian powerhouse is cutting rates in more than three years. The country will do that to prevent a sharper slump in activity.
According to Craig Erlam, an OANDA senior market analyst:
“Spikes in oil prices when the global economy is already flirting with the idea of recession are not ideal and, if repeated and sustained, could ultimately be what tips us over the edge.”
In the meantime, Portugal’s 10-year bond is reportedly under-performing. The yield is up 2 bps after S&P raised the stance on the sovereign’s BBB rating to positive on September 13. DZ Bank’s Lenz added:
“There was no rating upgrade, so there is still some gap between Portugal and Spain, so markets could try to reflect this, as Portugal is (still) not as good as Spain.”
The gap that now exists between Portugal and the better-rated Spain’s 10-year bond yields reached a record low of -5 basis points in the past week. Now, focus shift to ECB on September 16 where policymakers are scheduled to speak. Key speakers include Sabine Lautenschlaeger, Philip Lane, and Francois Villeroy de Galhau.