Monday morning isn't quite turning out as planned or at least as pre-market futures trading patters indicated earlier. Surging equity prices have floundered while a sinking dollar has reversed course following a slump in a key manufacturing gauge indicative of a standstill across the sector. The impact of a plausible solution to the debt-ceiling has quickly faded with most leaving the worry of a U.S. default in the dust choosing to focus instead on the rocky road to recovery.


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Eurodollar futures -Treasury yields rose only modestly ahead of trading in response to the weekend agreement across the political divide over raising the debt-ceiling. However, a mid-morning ISM manufacturing index slid to just above the critical break-even reading and further than investors were braced for indicating a further stall in economic activity even if only in the less important sector. The dip from 55.3 to an index level of 50.9 is much sharper than investors were predicting and comes a business day after a less than pleasant revision to first-half GDP. Combined with a lesser risk of default, assuming the both houses ratify the debt-ceiling proposal, investors drove treasury prices higher across the curve sending yields to the lowest so far this year. The 10-year futures contract expiring September rose to its highest price yet to trade at 126-13 lowering the yield to 2.75%. Meanwhile the Eurodollar futures curve also advanced sending implied yields lower by 10-ticks at deferred maturities.

European bond markets -European bond markets took their cue from events in the United States with benchmark yields in peripherals falling alongside German yields for a change. The European Central Bank will likely decide on Thursday to maintain short-term interest rates at 1.5% at its August meeting with threats to growth omnipresent from opposing angles of growth and sovereign debt. The latter issue remains an elevated concern for investors while the latest reading of manufacturing data also slipped in Germany keeping the sector barely edging forward in the Eurozone as a whole. EU-wide the July ISM manufacturing index stood at 50.4 for a second month. September bund futures surged in response to weakness in the corresponding reading of manufacturing for the U.S. reaching the day's high at 131.20 causing the benchmark 10-year yield to decline to 2.5%.

British gilts - Short sterling futures advanced as the British ISM manufacturing index slipped back into the contraction zone with the July index falling from mild expansion to a reading of 49.1. The British gauge admittedly had less far to fall to land in contraction territory but that's easily accounted for by the current near-zero climate for growth. The government has raised the tax level to fend off a blowout budget deficit, but many are wondering what the cost to growth will be in the forthcoming year. Money traders lifted sterling futures in response and continue to see no signs yet of an interest rate increase for at least one more year. Gilt futures expiring in September rose by more than one-half point to 125.83 chasing U.S. benchmark yields lower to 2.82%.

Australian bills - Aussie bills fared losses of up to three basis points as implied yields rose in response to the jubilant response of agreement on the U.S. debt-ceiling talks. The accord essentially paved a risk-rally in the overnight Asian session. The interest rate markets watched advances for benchmark stock indices around the region closer than a domestic slide in the fortunes of manufacturers. The AiG performance of manufacturing index took a dive from 52.9 to 43.4 during July. The benchmark government bond yield remained unchanged at 4.76%.

Japanese bonds - Yields remained unchanged in Japan despite the rally in regional stocks. At one point in early trading the yen fell sharply against the U.S. dollar taking some pressure off Japanese exporters' earnings. The yen later surged keeping a ligature around the neck of the manufacturing sector. The September JGB future was largely unchanged at 141.79 yielding 1.068%.

Canadian bills - Canadian markets are closed.

Andrew Wilkinson

Senior Market Analyst       

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