This was a week where Europe was firmly in the spotlight, and is often times the case; sometimes things wither and die when exposed to direct sunlight, beginning on Sunday night, when we received the election results from France and Greece and the markets decidedly showed their displeasure and concern. Money fled from anything associated with risk and found solace with safe harbor options like US Treasuries and German Bunds. At one point during the week, the UST 10-year was under 1.80% and the UST 30-year was under 3.00%. By the end of the week, money did move back out of safety as the flight-to-quality rally seemed a bit overdone.
For the week, the 2-year Treasury note yield was up 1bp to 26bps (its low of the week was 25bps); the 5-year note was down 3bps to 75bps (its low of the week was 74bps); the 10-year note was down 4bps to 1.84% (its low of the week was 1.79%); and the 30-year bond was down 5bps to 3.02% (its low of the week was 2.98%). In Germany, it was another week of record low yields all along the yield curve. The 30-year Bund fell to 2.188%; the 10-year Bund fell to 1.49%; the 5-year Bund dropped to 51.8bps; and the 2-year Bund touched 6.2bps.
In France, with the election of Francois Hollande, the country now has its first Socialist president since Francois Mitterrand, 17 years ago. The French Oat market pretty much just shrugged off the news as the 10-year finished the week basically unchanged at 2.80%. The level is currently 102bps lower than its recent high yield of 3.82% reached back in mid-November.
The Italian 10-year note was weaker by 8bps to close the week at 5.51%. The Spanish 10-year note crossed back over the 6% level and finished the week up 28bps to settle at 6.01%. The Portuguese 10-year rallied on the week to finish back through the 11% barrier at 10.94%, heading back towards its recent low of 10.44%, reached last month.
And then there is Greece. With the prospect of the anti-bailout parties (including SYRIZA) defeating the pro-bailout PASOK and New Democracy parties, there was much talk this week about the potential of Greece defaulting and/or exiting from the Euro. The Greek 10-year note reflected this uncertainly as its yield reached 24.84%, up 422bps this week. The 10-year is now at its highest level, up 639bps, since the Greek debt restructuring was announced back in March.
Not surprisingly, the equity markets were off for the week. The FTSE, the CAC and the DAX were all down for the week, closing at 5,575.52, 3,129.77 and 6.579.93 respectively. The Dow fell through the 13K level and was down another 200 points this week to finish at 12,817.73, while the S&P 500 and NASDAQ closed the week relatively unchanged at 1,353.33 and 2,933.82.
Commodity prices continued to decline this week, as fears of slower economic growth in Europe and Asia pushed prices lower. Crude oil prices fell for the second consecutive week, as the price dropped to a low of $95.34/b (a 6-month low) before finishing the week at $96.59/b. Oil supplies in the US have now reached 379.5 million barrels, the highest inventory since before Saddam Hussein invaded Kuwait back in 1990. (Think Sinead O’Connor’s “Nothing Compares 2 U”).
Gold fell through the $1,600/oz price level to a low of $1,572/oz. Gold is now off -$356.30/oz (or -18.5%) from its all-time high reached back in September.
Corporate debt issuance was quite brisk this week as deals from Sinopec, Diageo, Dish, Berkshire and IBM came to market. The marquee transaction of the week was Sinopec’s first US dollar-denominated deal in fifteen years. It was a three-tranche $3 billion package comprised of $1 billion each of a 5-year, 10-year, and 30-year notes. The securities are expected to be rated Aa3 by Moody’s. Diageo brought a $2.5 billion three-tiered structure to investors, made-up of $1 billion of 5-year and 10-year notes, and $500 million of a 30-year bond. Dish Network issued $1.9 billion of debt, while Berkshire raised $1.6 billion and IBM raised $1.5 billion.
JPMorgan was certainly in the news this week as they reported on a special conference call that they suffered a $2 billion trading loss which may end up growing to as much as $3 billion.
The markets will continue to be quite focused on both political and economic developments in Europe, and we will maintain a sharp lookout for any signs that things could be breaking one way or the other.
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