After a meltdown in Asia, the global capital markets are stabilizing in Europe. The US S&P managed to recoup about half of its losses before the close yesterday, but this gave not comfort to Japanese investors. The yen’s strength and ongoing concerns about banks’ exposure to energy companies took the down 5.4% and pushed the 10-year JGB yield into negative territory for the first time.  

The Dow Jones Stoxx 600 is off 0.25% near midday in London. Telecoms and consumer staples are firm, but materials and financials are the largest drags. This plays on the bank-energy theme as well as more concern about European banks. In particular, the contingent convertible bonds, which emerged as a part of the effort to strengthen bank balance sheets, are being “battle-tested”. The new  Bank Recovery and Resolution Directive (BRRD) which exposure fixed income investors to a greater risk of being bailed-in, may also be a source of anxiety.  

European bond yields are higher. Italian and Spanish bonds are nearly flat while core bond yields are 3-4 bp higher. Although Portugal appears to have struck a compromise with the EC over this year’s budget, and in some ways, as austere if not more than the previous center-right government.  The 50 bp increase in 10-year yields over the past five sessions, three times the increase that Spain, which is still trying to cobble together a government, is not a vote of confidence. Indeed, many suspect Portugal will be required to have a mid-course correction, i.e., more fiscal action when if slower growth risks a deficit overshoot. 

Oil is trading 1-2% higher even though the IEA reported that Saudi Arabia boosted oil output in January by 70k barrels to 10.2 mln bpd, and Iraqi output hit a new record high. It increased production by 50k barrels to 4.35 mln bpd. The US Department of Energy updates its short-term energy outlook and tomorrow reports the weekly inventory figures. The Bloomberg consensus calls for a 3.1 mln barrel build of crude stocks. This follows a 7.8 mln barrel build the previous week.