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SocGen Asks If The Eurozone Markets Can Handle A Bond Market Sell-Off

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On Monday, SocGen laid out its scenario for the struggling Eurozone. Some of the sell-off can be explained by rising inflation expectation, the launch of QE and a rebound in oil prices according to SocGen.

Liquidity has dried up in the bond market and that is most likely driven by tougher regulations for banks and institutions along with increasing market fund share. SocGen says, "Shallow market depth could cause sharp volatility spikes in the future" and warns that increasing rates are driving up currencies and depressing earnings expectations and stock valuations: "higher Bundy rates are driving the euro up, in turn depressing earnings expectations and stock valuations further."

The recent strength isn't expected to last and SocGen warns that risk of default to Greece is still open and "still appears significant over the coming months" even though Eurogroup President Jeroen Dijsselbloem official opened a portion of the 7.2 billion Euro fund for potential Greek disbursements to avoid a default on payments due at the end of July and August.

Sovereign risks still remain and the drop in Sovereign bond principals, according to SocGen, may continue to have its largest impact on the long end of yield curves, where duration highest. All eyes will remain on credit spreads and bond spreads.

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