The turn in energy prices and the rise in bond yields has started to affect global equity markets once again. In yesterdays US trading, treasuries opened weaker and just kept nudging higher. US Tens hit 3.095% which will also apply indirect pressure on Europe and EM bonds. The question is, was this the reason we saw equity markets wobble and if so, do stocks trade back up if the bond rout stops! Is it the fear that forced the equity weakness or is it money flowing out of fixed-income yet into stocks. We should keep a watchful eye on currency movements as the demand for USD continues to run, EUR/USD at YTD lows. The Italian BTP paper is widening out, with 10yrs paper losing 17bp today. A thought worth keeping at the back of your mind is, if they can’t hold Italy in, they will not hold Europe. The Italian Bond market is far too big to let slip, this will have huge implications for Bunds and OAT’s and all the periphery if it really starts to widen out.
The Italian index (FTSE MIB) lost over -2.3% in todays trading with many cashing-in on what they can. In troubles times like this the managers will sell what they can and not what they should! There will be bargains to be had, but make sure the currency is hedged as this will have far reaching ramifications. The Euro was down around -0.6% at one stage this morning, but have bounced from those levels by the close (-0.25%) although remains weak over the longer term.

Interesting that by the close of US trading US 10’s played around 3.10% again, yet core indices all bounced from yesterdays levels. Is it the fear of higher rates that wobbled stocks or is the market finally changing the way they view rate/stocks relationship? We did hear more on the North/South Korea issue and whether we still can expect calm between the two. However, Europe has far more potential to unsettle markets than Asia currently as this really has been the elephant in the room that no-one seems to want to talk about yet!

Japan 0.05%, US 2’s closed 2.59% (+2bp), 10’s 3.10% (+3bp), 30’s 3.22% (+3bp), Bunds 0.62% (-2bp), France 0.85% (-1bp), Italy 2.11% (+17bp), Greece 4.30% (+23bp), Turkey 14.11% (-10bp), Portugal 1.78% (+6bp), Spain 1.4% (+6bp) and Gilts 1.50% (-1bp).