Wall Street Breakfast: Bloodbath In The Bond Market

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Economy
A worldwide sell-off in government bonds deepened today, buoyed by rising German Bund yields that recently hit record highs and narrowed their gap with U.S. Treasuries. Benchmark 10-year Bunds now trade at 0.53%, having hit a record low of 0.05% last month, when many expected them to turn negative. The vicious bond market meltdown is also raising pressing questions for investors - is this a correction or merely a trend change?

Greece has made a €200M interest payment to the IMF that fell due on Wednesday, although concerns over its future continued to rattle European markets. Athens faces another €750M repayment obligation to the IMF on May 12 and many commentators are struggling to see where the money is going to come from. The cash-strapped country still remains in a deadlock with creditors over its next tranche of bailout funding.

U.K. services growth unexpectedly accelerated this month, countering signs that the economy was slowing before Thursday's knife-edge general election. Markit's services PMI climbed to an eight-month high of 59.5 in April from 58.9 in March, beating forecasts for a decline to 58.5. The latest opinion polls seem to show the Conservatives with a slight lead over Labour, although neither are on track to command a majority in the parliament.

Asian stocks outside of Japan (which is closed for a holiday) fell in another session, marking the second heavy sell-off this week after the RBA cut rates and reports that Chinese brokerages are tightening margin requirements. Data on Tuesday showed that the U.S. trade deficit widened in March to its highest level in more than six years, sending Wall Street down to its biggest one-day percentage decline since March.

Crude prices hit fresh 2015 highs overnight, continuing a rally that has surprised many investors almost as much as the steep sell-off that bottomed in mid-March. After gains of 20% for Brent and 25% for WTI in April, oil bulls pushed prices higher again this week, despite indications that OPEC would keep production unchanged at its meeting next month. The EIA is scheduled to issue official stockpiles data at 10:30 a.m. EST. Crude futures +2.5% at 61.89/bbl.

Stocks
Adding on to the heap of Salesforce rumors, Bloomberg says Microsoft (NASDAQ:MSFT) is evaluating a bid for the cloud software provider after it was approached by another potential suitor. Salesforce (NYSE:CRM) is reportedly working with two banks to determine a response. Bloomberg, however, cautions that Microsoft isn't currently in talks with the cloud CRM software giant, whose market cap stands at $49B.

U.S. antitrust officials are scrutinizing Apple's (NASDAQ:AAPL) efforts to line up deals with record labels as it prepares to debut a new version of the Beats Music streaming service this summer, Bloomberg reports. The FTC is now examining whether Apple is using its position as the largest seller of music downloads through its iTunes store to put rival music services at a disadvantage.

Wall Street Breakfast: Markets Prepare For Week Of Central Bank Decisions

7 comments  |  Includes: ALU, CGEMY, CMG, DB, IGTE, KO, MFG, MSFT, NOK, QCO

Economy
Interest rates won't be moving higher after the FOMC's meeting this week, but investors will still be watching the language of the statement for signs on when such a rate hike might be expected. Also on tap for Wednesday is the preliminary first-quarter readout of GDP, along with some early April economic reports. The spotlight in Asia this week falls on Japan, where a flurry of data releases and a central bank decision could provide clarity on the direction of the world's third largest economy.

Following its meeting, the Bank of Japan is expected to cut its 2015 inflation forecast by several tenths of a percentage point from 1%, and shave its growth forecast from the current 2.1%, FT reports. Despite inflation dropping back to zero, governor Haruhiko Kuroda has argued strongly that the BOJ's existing QE program is on track, leading many economists to think further easing is unlikely for now.

Red-hot mainland Chinese shares soared again today, propelling the Shanghai Composite Index up 3.1% (+39% YTD) to its highest level since late 2007. "Funds of various mandates are underweight the market in a range of 140-600bp, and thus have marked benchmark stress and a need to raise exposure to China," Goldman Sachs said in a note, citing EPFR data. "With active fund managers still underexposed to the market, the rally isn't over."

The finance ministers of Slovenia and Germany on Saturday acknowledged for the first time that they are considering plans on what to do if a Greek deal is not reached by the end of June, breaking their long-held stance of insisting that the country must stay in the eurozone. The issue of a "Plan B" was raised during Friday's Eurogroup meeting in Riga, where Athens was strongly criticized for delaying the list of reforms needed to unlock its next round of funding.

As the monetary easing by central banks across the globe keep yields at rock-bottom, investment officers predict that Japanese demand for U.S. debt won't ease up in the months ahead given the lack of alternatives. Japanese life insurers - some of the world’s largest institutional investors - plan to keep pouring money into U.S. debt this year, WSJ reports, outlining that Japan even overtook China in Q1 as the largest foreign holder of U.S. Treasurys. While the current 2% yield on the U.S. 10-year is a far cry from yields of 5% or more before the financial crisis, it is still miles apart from the 0.16% yield on German bunds and the 0.29% yield on the 10-year Japanese equivalent.

Stocks
Outlining its "next phase of strategy," Deutsche Bank (NYSE:DB) announced its much-anticipated strategic overhaul this morning, designed to close the gap with rivals for profitability and capital adequacy. The German lender said it would target €3.5B in annual savings by scaling back its investment bank and retail operations, floating a majority stake in Postbank and increasing automation. Yesterday, Deutsche said hefty legal charges (including its recent $2.5B Libor settlement) halved its first-quarter net profit to around €559M. DB -4% premarket.

Royal Bank of Scotland has sold another portfolio of North American loans to Mizuho Financial Group (NYSE:MFG), as it continues to sell off international assets to focus on domestic lending. The agreement swaps $5.6B of loan commitments for $500M in cash, generating an overall disposal loss of around $30M. Back in February, RBS (NYSE:RBS) agreed to sell different U.S. and Canadian loan commitments to Mizuho under a deal worth $3B, marking the biggest move overseas by one of Japan's top banks.