Despite Mario Draghi apparently trying to downplay the immediate need for the ECB to engage quantitative easing, the markets are taking a different view of what is required. Last week we saw investors continuing to buy German Bunds. In fact they are chasing the Bund to the extent at which buying a 10 year German government bond will yield the investor less than 1.0%.
Buying the 2 year bond actually yields minus 0.02%. With Germany falling back into contraction territory in Q2 and being the supposed growth driver of the Eurozone, this gives the ECB a problem. With Italy and France also moving back into contraction in Q2 and disinflation showing that prices are sliding ever closer to deflation, the voices crying out for the ECB to use its ultimate weapon are mounting. The German Bund is not the only sovereign bond that is in demand as French, Spanish and Italian yields spike to record lows.
Bond markets are sending a signal to the ECB that they are increasingly pricing in deflation in the Eurozone and the policy response of full-blown QE. The emphasis will grow on this week’s flash PMI data which could show that Q3 is struggling to muster growth too. If the Eurozone economic recovery is over and recession is on the horizon, then the ECB will have to use QE. It is just a matter of when.
DISCLAIMER: This report does not constitute personal investment advice, nor does it take into account the individual financial circumstances or objectives of the clients who receive it. All information and research produced by Hantec Markets is intended to be general in nature; it does not constitute a recommendation or offer for the purchase or sale of any financial instrument, nor should it be construed as such.
All of the views or suggestions within this report are those solely and exclusively of the author, and accurately reflect his personal views about any and all of the subject instruments and are presented to the best of the author’s knowledge. Any person relying on this report to undertake trading does so entirely at his/her own risk and Hantec Markets does not accept any liability.