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Prospects Daily: U.S. Treasuries gain for the first time in four trading sessions, U.S. unemployment rate falls to 6.1%, HSBC Emerging Markets Index rises further in June

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Financial Markets

U.S. Treasury prices gained on Monday as investors took advantage of bargain-priced bonds after three sessions of selling. Further, the fact that U.S. Treasuries are relatively cheaper than other safe-haven government bonds also boosted oversea demand. The additional yield investors demand to hold U.S. notes over German 10-year bunds is currently at 137 basis points, the widest since 1999.

Icelandis planning to sell its first euro-denominated international bonds since 2006, a move away from the dollar-denominated debt it relied on since the collapse of its banking sector in 2008. The country is likely to use proceeds from new issue to service a large redemption in the form of Nordic loans that it borrowed in 2008. Iceland sold two separate $ 1 billion dollar-denominated bonds in 2011 (5-year maturity) and 2012 (10-year maturity).

High Income Economies

As geopolitical risks weighed on business confidence and demand, German industrial production declined 1.8% (m/m) in May, after declining by a revised 0.3% in April. This unexpected decline was the third consecutive one and the largest since April 2012, when output dropped by 2.0%. Economists had forecast a 0.2% rise in output. Production in industry, excluding energy and construction, decreased 1.6% in May, after staying flat in April. Within industry, the production of intermediate goods and consumer goods contributed to the fall, decreasing by 3.0% and 3.5%, respectively.

After weakening in the previous two months, the Sentix investor confidence index for the Eurozone jumped to 10.1 in July from June's 8.5. Economists had forecast a lower score of 7.7. Leading the improvement was the economic expectations index that climbed to 18.3 from 17 in June and equaled May's score. The index rose for the first time in five months partly due to the interest rate cut and liquidity measures announced by the European Central Bank. The current situation index of the survey also moved up strongly to 2.3 from 0.3.

Preliminary data showed that Japan's leading index fell more-than-expected to 105.7 in May from 106.5 in April. Economists’ expected reading was 105.9. The latest reading was the fourth consecutive decline and the lowest score since February 2013. The coincident index that measures the current economic situation remained unchanged at 111.1 in May. At the same time, the lagging index dropped to 117.7 from 118.2.

Developing Economies

The HSBC Emerging Markets Index, derived from Purchasing Managers' Index (PMI) surveys, recorded its sharpest increase since March 2013, rising to 52.3 in June, well above the no-change 50 mark which denotes expansion, from 50.6 in May, but remained below its long-term average of 53.8. Underpinning this increase manufacturing output rose and activity in the services sector picked up to its highest level in 15 months in June. China and India contributed to the increase in the Emerging Markets Index, with output in both countries rising at their fastest pace in more than a year in June, while that of Brazil remained flat.

Sub-Saharan Africa

South Africa’s gross foreign exchange reserves decreased unexpectedly to US$48.6bn in June, down from US$49.2bn in May. Economists’ forecast was for gross reserves to rise to US$49.4bn in June. Net reserves increased moderately to US$44.8bn up from US$44.5bn in May.

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