The 10 year bund future hits a new record at 136.26

Markets have suffered from a round of several negative indicators yesterday. A morning report released by Morgan Stanley on Thursday showed a downward revision for growth perspectives regarding the world economy over 2011 and 2012 with a steeper revision for developed countries. The note shows that the American investment bank has lowered its forecasted GDP growth figure to 3.9% over 2011 against 4.2% initially and 3.8% over 2012 instead of 4.5%. According to Morgan Stanley, the GDP growth for developed countries should not exceed 1.5% in 2011 and 2012 (against 1.9% and 2.4% previously forecasted for each respective year). This downward revision proved to be greater for Europe over 2012. However, despite developed countries hovering close to recession, the investment bank excludes this scenario for the time being.
“Considering the current context, we are not expecting any interest rate hike from the ECB anytime soon but rather a further cut in interest rates next year – we lower our forecast on the refinancing rate at to 1% for the end of 2012 against 2% previously. (Note: The current ECB refinancing rate stands at 1.5%)” write the economists of Morgan Stanley.
“With anxiety growing on economic growth, we are expecting the 10 year bund return to fall to 2%” they add while advising to remain cautious on equities and to avoid investing heavily in cyclical shares.

Il n’en fallait pas plus pour faire dévisser les marchés. Les statistiques américaines et notamment l’indice Phil Fed (indicateur de l’activité économique de la région de Philadelphie), ressorti à -30.7 alors qu’il était attendu à +3.7 n’ont fait qu’accélérer la tendance à la baisse, le CAC40 clôturant finalement à 3 076, soit une baisse de 5.48%. Le DAX perdait lui 5.82% à 5 602 et l’Eurostoxx 4.32% à 2 161.

This note was all that was required to spook the markets. US economic indicators and especially the Philadelphia index (indicator measuring economic activity in the region of Philadelphia) accelerated the downtrend. The index came out at -30.7 against an expected +3.7%. This lead to the CAC 40, DAX and Eurostoxx to lose 5.48%, 5.82% and 4.32% respectively (Closing numbers were in order 3076, 5602 and 2161).

These massive liquidations have lead to a flight towards assets judged as less risky and especially the Bund which went through a violent upward spiral that saw it hit a historic peak of 136. (Note: It touched 136.26 which corresponds to a 10 year interest of 2.028%). The 10 year US interest rate have gone below 2% for the fist time since 1950 while the 10 year French bonds have fallen to 2.7% The V2X which measures volatility on the Eurostoxx has progressed form 35% to 47%.

The Swiss franc which also acts as a safe haven has interrupted its upward trend after measures taken by the Swiss government which judged it as being overvalued. The Finance minister, Eveline Widmer-Schlumpf has announced a 2 billion franc support plan towards economic sectors where the situation has been qualified as “fairly critical” because of this monetary evolution. Capital controls are also being considered. Since the beginning of the year, the euro lost more than 8% against the Swiss currency while the dollar has lost more than 15%.

On the first 8 contracts, 3-month Swiss futures on short term interest rates have been implying negative interest rates for the first time in history. The SEP11 future closed at 100.34, the DEC11 future at 100.57 as well as the MAR12 future. The following futures : JUNE12, SEP12, DEC12, MAR13 and JUN13 have respectively closed at 100.48, 100.38, 100.27, 100.18 and 100.0