Yields are higher across the board in Europe unlike yesterday when French oats and Italian, Spanish, Portuguese and Greek bonds rallied in celebration that the EU experiment is living to fight another day and it was German bunds and some other country bonds lower in a flight from safety. This whole group now is an even bigger short than before the election with political worries now calmed. The German 10 yr yield in particular is at a one month high and the German 2 yr yield is at a 3 month high. Draghi and the ECB do meet on Thursday and while Draghi has another chance to give us clues on the next taper, maybe he wants instead to wait until after the French election is official in two weeks. The rise in European yields is dragging the US 10 yr to back to 2.30%. I do have to say, for all the stock market excitement yesterday, the 4 bps rise in the US 10 yr was not reflective of the same optimism. We of course can say that about the entire drop in yields over the past month.
Here’s another sign that global trade is improving. Exports from Hong Kong in March grew by 16.9% y/o/y, well more than the estimate of up 10.4% and it follows an 18.2% y/o/y gain in February. Exports grew in all major regions. Imports were up by 13%, about in line. I’ll leave it to the Hong Kong government to bottom line it in the press release: “Looking ahead, the gradually strengthening global economic conditions should continue to render support to Hong Kong’s export performance in the near term.” But here is the caveat, “However, the outlook it still subject to uncertainties, including those related to the US interest rate normalization, Brexit and other political developments in Europe, possible rise of protectionist sentiment and heightened geopolitical tensions in various regions.”
One interesting development of late is the weakening of the Hong Kong dollar versus the US dollar as interest rates in Hong Kong haven’t reacted fast enough to the rise in US rates with the currency peg being the main link. Hong Kong has a huge property bubble on their hands so they might be dragging their feet in responding with higher rates but that then could put a strain on the peg. The spread between 1 month HIBOR in Hong Kong and 1 month US LIBOR is at the highest level since December 2008 with the latter higher by 60 bps. See chart on HKD:
The Hang Seng was higher by 1.3% in response to the trade data after yesterday’s .4% bounce. Off a 3 month low, the Shanghai comp was up by .2% but the H share index traded much better with a 1.6% rally. For perspective, the Hang Seng trades at 12x 2017 earnings. Again, the more attractive stock market opportunities I believe are outside the US.
Surveyed before Sunday’s election, French business confidence in April held at 104 as expected. This is within 1 pt of matching the best level since 2011 and we’ll of course look forward to the May read to see if it gets close to the ’07 peak of 115. Remember, MFGA! Within the index, the manufacturing component improved by 3 pts to 108, 3 pts better than forecasted and is now at the best level since 2011. Drops in services and retail is what offset this. On a closing basis, the French CAC today is trading at its highest level since 2008 but still has another 900 pts to get back above that level’s high. The record high in the CAC was actually back in September 2000.