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It was a huge night for Italian bonds and European bond markets all-round. Despite strong polling in Greece, France and the UK from euro-sceptic parties, the market piled into European debt, with a spike in prices (fall in yields) across the board. Given the polling for Matteo Renzi’s PD party it seems Italy was actually the driving force here, with the public giving the ruling party their stamp of approval. ECB president Mario Draghi also provided dovish rhetoric, in which he laid out in some depth the policy tools at the ECB’s disposal and the scenarios under which the bank can use them.
China’s housing has been a major concern for much of the year, with new home starts coming off sharply in the first four months of the year, relative to that of the same period last year. Housing inventory has also increased to stand at 17.7 months sales, while housing inflation has cooled of late. Premier Li has been increasing language around a more accommodative stance and mentioned last week that the PBOC could ‘fine tune’ policy. Any rhetoric that supports housing in China will put a bid in copper, and judging by recent price action in the metal it seems the market is warming to the easing commentary.
The Japanese market has been finding good buying activity lately and while moves in USD/JPY have largely been at play, it’s worth highlighting that corporate Japan is in good shape, with a large number of companies announcing share buy backs and other capital management initiatives in the recent earnings season. The Japan 225 should also find support as we head into the latter stages of June on hope that we hear an announcement that the Government Pension Investment Fund (GPIF) could shift a small percentage of its portfolio away from a JPY bond bias and place a larger allocation into foreign securities. It has been estimates that given the sheer size of the fund ($1.4 trillion) that we could see around JPY 20 trillion in foreign security purchases over the coming 12-18 months. Investment bank Nomura estimates this could weaken the JPY by about 10%, which will have positive ramifications on the equity market.
The German market (like other European markets) is taking inspiration from a dovish ECB, while language from the PBOC in China have also provided support. A new all-time high was seen in the German market and while volumes were light, the index is a pillar of strength. The path of least resistance is higher and pullbacks continue to be supported. Long positions are preferred given the trend.