Daily Musings and Music of a Euromarket Professional

Uncomfortable as it may be, being aware of sitting on a time bomb shouldn't keep us from being able to laugh about it - and to listen to some music!

Daily musings of a euromarket professional

Friday 23 March 2012

23 March 2012 – “Rain on Your Parade” (Duffy, 2008)

Contraction time, part II. Asia finally gave in to the gloom at the end of the week and caught back o yesterday’s 1%+ slide in Europe and tamer US session with the S&P closing back through 1400 and the Dow nearing the 13k mark again. No more specifics than correlation. CNY official fixing at record low (4% appreciation over the last 12 months against USD, 8% over the last 2 years. 10% against the EUR. That ought to soothe trading partners’ nerves).
French biz outlook at 96 on the brighter side with 93 forecasted after 92 (revised to 93). Surprising, as the presidential campaign is set to speed up soon. But here again, the widely heralded “end of the crisis” is probably biasing the outlook. Talking of France and elections: some piqué reactions here and there to the announcement that Eurex was to revive an OAT future by mid April – with implications of easier means to short the French credit. IT retails sales of -0.8%, less badly than expected (-3.4% YoY), but with no noteworthy positive reaction to it.
European open flat to positive in a tentative rebound. EUR back to o1.327 and commodities right back to yesterday morning levels, correcting out Thursday afternoon’s weakness. Bunds unchanged to a tick weaker, but periphery a tad more weak with 10 YRS Spain trading above 5.50%. The Dutch spread spike mentioned yesterday is doing its rounds, too. Credit indices unchanged after the last days post-series rolls readjustments over. The Friday morning stand-still just didn’t last and equities were soon down 0.75% and Bund futures bid up half a point, softening further into the afternoon.
Weak Feb US home sales and the revision to lower numbers of prior data (313k against fcst 325k. MoM -1.6% against a forecast of +1.3% and revision to -5.4% against prior -0.9%) was just what was needed for a final push to end the week on a risk off note, however US markets held once more and floored the European weakness. Sovereign spreads finally by and large stable with Spain actually outperforming, having earlier traded wider in absolute and relative terms. Bunds 20 ticks off highs.

Italy priced a size-able retail offering of EUR 7.3bn of 4 YRS ILB after starting the sales this week. Looking to catch that demand on a quarterly basis, if possible. Would be EUR 20-30bn per year, although the novelty effect might fade at some time and retail maturities tend to be shorter. Still, tapping retail is all the less to raise with institutional investors (2.45% sa on revalued principal + revalued principal pay-out).
Not that it’ll change much, but holders of Greek debt issued under foreign jurisdiction had until tonight to state whether or not to participate in the PSI. That offer was extended to 04 Apr. Not sure holding out will yield much in the short term, given where CDS did settle and the “voluntary” haircut agreed on the bulk. Still, the question is how cumbersome Greece’s “practical” life can become, if hassled over time in foreign jurisdictions. So it’s less a question of reputation then getting your consulate car repossessed every second day. To be followed. Not a huge tail risk, but could provide some headlines next week.
In the meantime, the new GGB have now all broken back through the 20% price level with yields ranging from about 20% to 17% for 2023s and 2042s.
In comparison, 2 YRS Portugal are quoted 15%, 5 YRS 15%, 10 YRS 12.75% and the 2037s about 10.30%

No noteworthy new issues supply.

ECB deposits up EUR 8bn to EUR 763bn.
VIX closed 15.6 in the US from European COB at 16 on Thu. Back through to 15 at European close.
Oil remains range bound and still resilient to the European gloom at 105.5 / 123.7 by noon, getting traction at the NY open and adding another $1.5 into the close at 107.0 / 125.1 (+1.9% from 105.0 / 122.8 WTI / Brent at European COB). Gold softer to 1650 at noon, closing 1660 from 1653 (+0.4%). CRB up 0.9% to 315 on stronger energy and metals.
Baltic Dry up 908 after 902, yet another 0.7% rise.

10 YRS Yields: Germany 1,87% (-4); Swaps 2,32% (-2); Finland 2,29% (-3); Luxembourg 2,32% (-3); Netherlands 2,45% (-3); Austria 2,89% (-5); France 2,94% (-5); EFSF 3,05% (-4); Belgium 3,36% (0); Italy 5,03% (-5); Spain 5,35% (-12).
10 YRS Spreads: Swaps 43bp (+1); Finland 42bp (+1); Luxembourg 45bp (+1); Netherlands 58bp (+2); Austria 103bp (-1); France 107bp (unch); EFSF 118bp (0); Belgium 149bp (+4); Italy 317bp (-1); Spain 348bp (-8).
EUR swap curve 2-5 YRS 51,8bp (-1,1); 5-10 YRS 71,9bp (-0,1) 10-30 YRS 26,1bp (+0,0).
Bund yields tanking in the morning, as soon as equities turned negative. First outperforming the periphery, but holding quite well the equity and periphery rebound. Didn’t see any specific reason for the Spanish intraday catch-up (except being cheap at 5.54%). Finally spreads by and large unchanged, yields lower. Netherlands, Belgium, Italy a tick softer to Bunds.

On the week:

-                                        Welcome back to gloom, if not yet doom.

-                                        10 YRS Yields: Germany 1,87% (-18); Swaps 2,32% (-13); Finland 2,29% (-17); Luxembourg 2,32% (-15); Netherlands 2,45% (-10); Austria 2,89% (-7); France 2,94% (-7); EFSF 3,05% (-21); Belgium 3,36% (+6); Italy 5,03% (+18); Spain 5,35% (+17).
-                                        10 YRS Spreads: Swaps 43bp (+3); Finland 42bp (+1); Luxembourg 45bp (+3); Netherlands 58bp (+8); Austria 103bp (+12); France 107bp (+11); EFSF 118bp (-3); Belgium 149bp (+24); Italy 317bp (+37); Spain 348bp (+35).
-                                        German 10 YRS have pretty much recouped most of their losses over the last 2 weeks, nearing their generic 1.80% historic floor.
-                                        2 YRS BKO were 0.33% last week, back now 0.23% (-10 bp), 5 YRS OBL were 1.07% last Friday, now 0.88% (-19 bp).
-                                        EFSF bonds fared best, after the issuer’s double-deal in 5s and 20s this week.
-                                        The Netherlands (+8) have decoupled from Luxembourg, Finland and Generic EUR swaps and stick-out from the Core EZ+ group.
-                                        Italy and Spain have both been mostly weak, although Spain 10s got a lift this afternoon Firewall jitters…

-                                        Corporate new issues were really active until Wednesday. Maybe a bit too much for their own good, but demand for household names remains strong, especially if in need to chase yield.
-                                        Credit was uneven to equities, but had roll-induced volatility. Main at 118 (from 119), Financials 209 (from 191 or 9.4% weaker) and Sovereigns ended back up at 280 (after exclusion of Greece and inclusion of Cyprus). Had index rolls from series 16 to 17.

-                                        European equities traded one last, new high for 2012 at 2540 on Monday, closing 2455 / -3.2% (from 2537 last Friday) and the S&P at 1395/ -0.7% (from 1405).
-                                        VIX unchanged 14.9. It’s been witnessed moving this week with spikes at over 16 on Thu. Too much effort.

-                                        EUR 1.326 from 1.318. Still pretty much without risk on / off barometer function.
-                                        Commodities by and large stable on the week. Oil 107.1 / 125.5 from 106.5 / 124.7 / 106.5 (+0.6%/+0.6%). Gold 1661 from 1654 (+0.4%). Brent in EUR at 94.25 about 1.7% off all-time high 95.85 on 13 Mar. Copper 380 from 389 (-2.3%). CRB 315 from 316 (-0.3%). Risks to growth maybe, but commodities are living it well.
-                                        Baltic Dry 908 from 874 (+6.8%, after +6% the week before)

All was too easy and relaxed last week. Post-Greece euphoria, riding the wings of LTRO liquidity, risk assets just seemed a bargain. It has since rained on the parade.
The European unity behind the austerity and the “we need to bring our houses back in order” is crumbling from South (Spain) and North (Holland). The growth needed to sustainably get money back to the coffers seems to have gone missing (worldwide), despite early year upticks, doesn’t seem sustainable. Commodities might further act as break.

DE IFO 109.5 fcst after 109.6. People will check expectations that might have been too high lately. 102.6 after 102.3
FR job seekers change 2878 from 2862.  IT Consumer Conf 92.8 fcst after 94.2. US MoM pending home sales 1% fcst after 2% / 10.3% YoY.

Next week: Again not much supply pencilled in. On the macro front, IFO on Monday, CPI figures ahead of the following week’s ECB meeting. US a bit of everything every day. Asia, not much. Q1 will end at the end of next week, followed by the biz disruption of the upcoming Easter season the week thereafter.
DE: IFO (Mon), Consumer Conf (Tue), CPI (Wed), Employment (Thu), Retail Sales (Fri)
FR: Employment (Mon), Q4 GDP (Tue), PPI & consumption (Fri)
Other EZ: IT Cons Conf (Mon), Biz Conf (Wed), CPI (Fri). SP Mortgages (Mon), Budget (Tue), CPI (Thu)
US: Home sales (Mon), Consumer Conf (Tue), Durable Goods (Wed), GDP & claims (Thu), Pers Inc & Spending, Chi Purchases, Michigan Conf (Fri) + various housing data throughout the week.
Asia: JP Small biz conf (Tue), Retail trade (Thu), PMI & Ind Prod & Construction (Fri). Not much in China.

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