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The Eurozone periphery government bond yield rose for the first time in more than a week on Monday as investors moved took prices down to make room for some 20 billion euros of bond supply from the region this week, halting a post-Brexit slide in yields.
The French 10-year bunds yield rose 2 basis points to 0.179 percent, Italian equivalents inched higher 4 basis points to 1.263 percent, Netherlands 10-year bonds yield jumped 1 basis point to 0.072 percent and the Spanish 10-year bonds yield bounced nearly 3 basis points to 1.173 percent by 11:15 GMT.
Following the UK referendum outcome, 81 percent of economists surveyed by Bloomberg expect the ECB to add stimulus. Among those, 40 percent expect a deposit rate cut, 30 percent expect an expansion of the pace of QE, 20 percent foresee new long-term loans, 90 percent assume an extension of QE beyond March 2017, and 30 percent look for other measures.
Only 21 percent expect any action at the ECB's 21 July meeting, whereas 70 percent pencil it in for September. The survey also found that Eurozone GDP growth will suffer by a median of 0.1 percent this year and 0.3 percent in 2017.
Regarding ECB policy, a source report came out on Friday contradicting the one the previous day saying the governing council is considering adjusting its QE allocations in favour of the higher-yielding countries with greater debt stocks (i.e. Italy).
It's not clear whether the ECB will in fact take such a controversial decision as soon as its July ECB meeting, but it seems likely to happen at some point. In any case, BTPs didn't reverse their outperformance, with the 10-year Italian/German yield spread in the mid-130s, the narrowest in a week.
Moreover, the Bundesbank President Weidmann said that he sees no need for further policy easing in response to Brexit; monetary policy cannot address political uncertainty. Even though Weidmann is hawkish, we don't see any immediate ECB policy action yet either; the central bank will monitor the fallout over the coming weeks/months. We do, though, continue to look for a final 10 basis points deposit rate cut in September. And more easing may well come if economic prospects markedly deteriorate.
Apart from this, Germany's Finance Minister Schaeuble said that Germany wants national governments to set the pace for future cooperation within the European Union and they should sidestep the European Commission in Brussels if needed.
The Brexit reality has pumped in a lot of uncertainty over sustained co-operation within the currency bloc. Schaeuble’s comments outline the emerging response from Chancellor Angela Merkel, whose government fuelled last month’s UK referendum, resulting in Britain’s exit from the premises of the European Union. Further, it signals a looming clash with advocates of EU integration such as European Commission President Jean-Claude Juncker and those governments that view German-led budget rigor in the euro area as holding back growth and jobs, Bloomberg reported.
According to Reuters, Mizuho Bank said the fact that Spain on Friday said it will not sell 10-year bonds at an auction on Thursday is another clue that a new 10-year issue is coming. Spain plans to issue bonds due in 2021, 2024, 2025 and 2030. Austria will sell 1.1 billion euros of bonds on Tuesday, Germany holds a 2-year bond sale on Wednesday and France will sell 9 to 10 billion of fixed-rate, long-term bonds on Thursday.
In terms of data, the Sentix Eurozone investor confidence indicator for July fell to 1.7 from 9.9, undershooting expectations of 5.0. This is the lowest in 1-1/2 years. The Current Conditions component dropped less to 5.5 from 9.8, while the expectations measure fell to 2 from 10. Such deterioration in sentiment is not surprising in light of the UK's referendum, and will inevitably manifest itself in forthcoming surveys.
Meanwhile, the pan-European STOXX 600 index was down 0.42 percent and the euro-area blue-chip gauge, the STOXX 50 dipped 0.13 percent. The DAX trading 0.31 percent lower and the CAC-40 fell 0.38 percent by 11:15 GMT.
