Eurozone Likes Russia-Ukraine Truce - Ahead of Wall Street

By Zacks | Updated September 03, 2014 AAA

Wednesday, September 3, 2014

U.S. stocks will likely follow the lead from markets around the world, particularly in Europe, to respond positively to the reported truce between Russia and Ukraine. It isn’t clear at this stage whether we do finally have a deal or not, but even the move towards one is a net positive for investors.

All major European stock market indexes responded positively to the deal announcement. The recent decline in government bond yields, particularly beyond Germany, has been due to the region’s deflationary spiral that is pushing the European Central Bank (ECB) to come out with a more forceful monetary policy response (a QE of their own). As a result, Spanish, Italian and other government bond yields have reached record low levels lately.

The safe-haven trade into German government bonds has started unwinding following the Ukraine deal news. But they remain extremely low despite today’s uptick. After all, German government bond yields are in negative territory for up to three-year maturity and under-1% for the 10-year maturity.

Government bond yields this side of the Atlantic have started going up as well, but the catalyst here seems to be the delayed realization of the changing macroeconomic backdrop. Yield on the 10-year treasury bond closed Tuesday notably above the Friday level following the surprisingly strong manufacturing ISM survey.

The uptrend in yields appears to be in place for today’s session as well, though it will be interesting to see if the trend will accelerate following a good jobs read on Friday. That said, we shouldn’t lose sight of the fact that yields are at such low levels that it will be a while before they reach even remotely menacing levels.

Many of us had been surprised by the recent downtrend in treasury yields in the face of stronger economic data. The move was plausibly explained by safe-haven trades and global central bank purchases. But confirmation of this trend reversal in response to stronger economic data will make even more sense. Importantly, yields still remain low enough not to be a worry for stock market investors… at least not yet.

Sheraz Mian
Director of Research

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