European bonds rise

June 3, 2016

The Eurozone government bonds traded modestly firmer on Friday as investors were wary of making big moves ahead of US jobs report, which could offer hints about the pace of Fed interest-rate hike.

Also, slowdown in Chinese PMI boosted trader’s interest in buying safe-haven instruments.

The benchmark German 10-year bonds yield, which moves inversely to its price fell 1 basis points to 0.103 percent, French 10-year bunds yield dipped 1 basis point to 0.453 percent, Irish 10-year bonds yield moved down 1-½ basis points to 0.775 percent, Italian equivalents inched lower 1-1/2 basis points to 1.366 percent, Netherlands 10-year bonds yield tumbled 1 basis points to 0.317 percent, Portuguese 10-year bonds yield hovered at 3.174 percent, Spanish 10-year bonds yield remained steady at 1.487 percent and British 10-year bonds yield fell 1/2 basis points to 1.339 percent by 10:00 GMT.

The US May Labor Department employment situation report will be released on Friday at 12:30 GMT. We expect non-farm payrolls will increase +180k in May, on the contrary, the market is expecting an increase of +165k, as compared to +160k reading seen in April, alongside a decrease in the unemployment rate to 4.9 percent, investors consensus are for a 4.9 percent result.

Moreover, the focus will likely be paid to gains in total private employment which we expect will increase around +175k. Beyond the headline, we expect average hourly earnings will increase +0.2 percent m/m, alongside no change in weekly hours of 34.5. On balance, despite the notable weakness seen in recent months, we anticipate further improvement taking hold in the coming months as conditions gradually improve.

In addition, The European Central Bank, at its policy meeting yesterday, left interest rates unchanged, while sounding cautious on the outlook for the Eurozone, which faces downside risks from global threats, especially the "Brexit" referendum.

The ECB left the rate on bank overnight deposits at -0.4 percent, the main refinancing rate at 0.00 percent and the rate on the marginal lending facility at 0.25 percent.

ECB President Mario Draghi in his speech at the policy meeting on Friday, warned investors of a possible threat if a 'vote out' comes in for Britain, while he also left the door open to adopting possible action if inflation remains below target. This, in fact, seems a strong possibility, given the ECB’s latest forecasts.

Meanwhile, the pan-European STOXX 600 index was up 0.50 percent and the euro-area blue-chip gauge, the STOXX 50 jumped 0.28 percent. The FTSE 100 Index rose 0.94 percent, the DAX trading 0.48 percent higher and the CAC-40 ticked up 0.47 pct by 10:00 GMT.

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