20 January 2012 – “Where do we go now? Where do we go now?” (Sweet Child o’ Mine, Guns N’ Roses, 1987)

20 January 2012 – “Where do we go now? Where do we go now?” (Sweet Child o’ Mine, Guns N’ Roses, 1987)

Hmmm, what to say when nothing happens? Open about unchanged after uneventful US and Asian sessions. EUR most notable overnight mover, squeezed up to 1.2990 (from 1.29 close) and then sent back to the 1.29-area for the European open and static thereafter. Greek PSI discussion leaks creating the most notable wave(lets) on equities, but sent BUNDs tanking, sending the spread to swaps to near mid November lows (42), respectively early July 2011 before that. EZ sovereign spreads tightening. Financials still tightening. EUR 3m basis stable on Summer 2011 lows (That is before the spike, when all went awry). Credit for choice a touch firmer than equities for most of the day, before correcting.

ECOFIN meeting, early next week, if successful, might bring the “fiscal compact” forward. Time to sound the all-clear?

Portugal remained shaky, as throughout the whole week, as S&P’s downgrade, deprived it from its last IG rating. The forced exit from IG-restricted indices and forceful liquidations have pushed Portuguese yields to yet unseen levels. 2 YRS 15%, 5 YRS 18%, 10 YRS 14%.  Bonds beyond 5 YRS trading at 50 cts on the EUR. Sounds awfully Greek. Haircut syndrome. Hmm…

Having delved on ECB deposits” seasonality yesterday with the start of the reserve maintenance period an explanation for the fall from EUR 528 to “only” 395bn, that seemed to have only be a short-lived respite, as deposits were already back to EUR 421bn yesterday. Hmm…

Finally, Baltic Dry deep diving (862, still Jan 2009 levels…). Hmm…

Distribution of yesterday’s Austrian 2-trancher: as expected, 10s mostly ok, but no stunner. Numbers on the 50-year tranche, on the other hand, very impressive with more than 90% real money picking up EUR 2bn. Worth a Waltz! Will be getting more EZ core ultra longs via auctions next week.

Primary Markets on hold. Should see less USD SSA next week with Asia mostly closed. Need to see if financials tightening would allow some action here. Likewise for corporates.

Spreads to Germany all tighter, with RISK ON bund futures sell-off: Netherlands +29 (-1), Finland +34 (unch), 10 YRS swaps (aka swap spread) +45 (-3), Austria +128 (+3), France +128 (-7), Belgium +236 (-14) [on new reference], Spain+335 (-2) and Italy +451 (-11).

So? Was this such a good week for sovereigns? Yes and no. On the positive side, there’s was no meltdown after the S&P downgrade round, but then again, looking at 10 YRS over the week: Germany 1.94 (+18) Netherlands 2.24 (+16) Finland 2.29 (+17) Swaps 2.37 (+9) Austria 3.06 (+7) France 3.07 (+2) Belgium 4.05 (-3) Spain 5.42 (+27) Italy 6.24 (-36).

Looking at 2 YRS benchmarks: Germany 0.21 (+6) Netherlands 0.20 (+2) Finland 0.21 (-1) Austria 0.47 (unch) France 0.74 (+12) Swaps 1.20 (+2) Belgium 1.68 (-24) Spain 3.18 (+31) Italy 3.78 (-37). To round it up, EFSF 10s 3.29 after 3.12 and 3s 1.76 after 1.72, as for Portugal, one way (see above). Well, hmm… Okay: Italy better, Spain over-supplied, Belgium faring well. Periphery generically better on LTRO. Core worse on massive risk on.

Spreads tighter, but it’s not like we witnessed a miracle. Does this warrant a 4% plus surge? Financials at 228 from 268 (15%), Main 152 from 171 (11%).

Comfortable end of a relieving week. All risk on? Question is: Where do we go now?

Happy New Year to all APAC readers