US futures are deep in negative territory ahead of the open on Tuesday as rising bond yields once again weigh heavily on equity markets.
In Europe, we’re seeing heavy losses across the board, particularly in Germany where the DAX is down more than 2%. The rise in bond yields is not entirely surprising as the recent recovery in oil prices has lifted the inflation outlook which in turn is pushing yields higher. Given how many bonds were offering negative returns in Europe, there was plenty of scope for upside moves if we saw this kind of rebound in oil prices.
The surprising thing is just how aggressive the sell-off in bonds has been and that is really hitting sentiment. The stranger thing is that we’re only a couple of months into the ECBs bond buying program which is scheduled to continue for another 16 months. Surely at some point, yields will have to stabilise. That is, unless the rebound in oil prices is leading people to question whether the ECB will cut short its bond buying program.
Greek yields are also rising strongly which suggests that investors do not believe negotiations are progressing as well as is being made out. Furthermore, Greece may have managed today’s repayment to the IMF, but Varoufakis yesterday referred to liquidity as being a “terribly urgent issue”, suggesting that the country could be a couple of weeks from running out of cash.
That doesn’t leave Greece much time to strike a deal with its creditors, especially if they are considering holding a referendum on any deal that doesn’t fall within the mandate that saw them elected in January. Talk of a transitional deal suggests this could drag on longer but I struggle to see its creditors agreeing to this. Instead, as Greece nears a default, it may be forced to implement capital controls on banks to prevent what cash is left being emptied out of accounts.
On the data front today we’ll get the latest JOLTS job openings figures, which should provide further insight into the health of the labour market. More openings suggests job creation is strong and people are moving companies, which spurs good wage growth, the main thing lacking from the US economic recovery right now. We’ll also get the NIESR GDP estimate for the three months to end of April for the UK and hear from FOMC member John Williams.
The S&P is expected to open 17 points lower, the Dow 142 points lower and the Nasdaq 38 points lower.
For a look at all of today’s economic events, check out our economic calendar.