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

Monday 23 April 2012

23 April 2012 – "Double Dutch" (Malcolm McLaren, 1983)

      23 April 2012 – "Double Dutch" (Malcolm McLaren, 1983)

Boo! Boo! Boo! Euro-depression start into the week. Weaker Asia. Weak China on 6th consecutive below 50 PMI reading (49.1 after 48.3) were just the beginning. PMI reading across Europe all on the soft side and well below estimates. EZ manufacturing PMI at 46 (48.1 fcst), Composite at 47.4 (49.3 fcst after prior 49.1), so not the hoped for uptick. German Manu PMI also a big miss at 46.3 (49 fcst after prior 48.4). French Manu just a slight miss, but important Service PMI at 46.4 (50.1 fcst from 50.1). French biz confidence likewise a miss at 95 (fcst 96 after 96, revised to 98).
To round up fundamentals, Bank of Spain Q1 estimates were down 0.5% YoY after -0.4% in Q4, tippingSpain into recession.

To round up the jitters: we’ll throw in Hollande’s lead in the first round of French elections and the failed Dutch budget talks, triggering early election talks (confirmed by the end of the day).
A little too much… Risk Off right away.
French OATs suffering an unsurprising initial knee-jerk reaction (out to 3.15% from 3.08% and then back to 3.09%), but eventually about ok, although wobbly. Stable throughout the day, but not following Germany tighter.
Further development of the spread will hinge on how low both centre candidates will need to go to pick additional voices from the extremes. Hollande (28.6%) in better position than Sarkoszy (27.2%) in initial polls (45-55). Given late retorics, doubtful that markets will apreciate.
It’s the Dutch 10s that got hammered (+10 bp at open, but with a smaller tightening back). All the while German 10s traded tighter on flight to quality. This left the Dutch –German spread 10 wider at +70 (60 on Friday, 50 a week earlier). There still some room before joining the “EZ Core Minus” club of Austria andFrance (to which Belgium starts to cling back). Unlucky timing with up to EUR 2.5bn 2 YRS to be auctioned on Tuesday.

Need another downer? The Eurostat publication of final 2011 figures: Debt/GDP Austria 72.2% (after 71.9%), Belgium 98.0% (after 96.0%), Finland 48.6% (after 48.4%), France 85.8% (after 82.3%), Germany 81.2% (after 83.0%), Greece 165.3% (after 145.0%), Ireland 108.2% (after 92.5%), Italy 120.1% (after 118.6%), Luxembourg 18.2% (after 19.1%), Netherlands 65.2% (after 62.9%), Portugal 107.8% (after 93.3%) and Spain 68.5% (after 61.2%). Nothing new, but a stark reminder of things. For completeness sake UK 85.7% (after 79.6%).
The silver lining, if there’s any, is that deficits have come down from 2010. However, as austerity triggers negative feedback loops…

Into the afternoon, equities were down 2%.5. Credit wider by 5 points. Holland and Italy spreads wider by 12 and 10, rest of Europe wider by 4 to 6 bp. 5 YRS OBLs closing at a record low of 0.61%. 10 YRS as well, when considering that the old Jan 2022 is now at 1.55% and the new 10s traded down to1.62%. Commodities down about 1.5% in sympathy.
Markets floored until US open and in absence of US figures. US equities opened down 1.5%, taking European peers to the -3% level. Credit softer, too. Spain taken up to 6% and Italy to 5.75%.
Ugly close – once more...

New Issues on stand-by. Supply of about EUR 7.4bn French bills with EUR 4bn 3m at 0.09% plus EUR 1.8bn 6m at .012% and EUR 1.6bn 0.25%, all line with healthy bid to cover ratios – but all 2 to 3.5bp more expensive than 2 weeks ago. Had incidentally as well EUR 2bn German 1-year bills sold this morning at 0.07% in comparison.

10 YRS Yields: Germany 1,64% (-6); Luxembourg 2,18% (-3); Swaps 2,21% (-3); Finland 2,25% (+0); Netherlands 2,42% (+10); Austria 2,93% (0); EFSF 3,00% (-1); France 3,09% (+1); Belgium 3,48% (+2); Italy 5,73% (+7); Spain 5,98% (+4).

10 YRS Spreads: Luxembourg 54bp (+4); Swaps 57bp (+3); Finland 60bp (+7); Netherlands 77bp (+17); Austria 129bp (+6); EFSF 135bp (+6); France 145bp (+8); Belgium 183bp (+9); Italy 408bp (+13); Spain 434bp (+11).
Periphery-like quality bashing for the Dutch debt. France eventually stable, but will need to see candidates’ view on future spending / savings.

EUR swap curve 2-5 YRS 45,2bp (-2,1); 5-10 YRS 70,5bp (+0,0) 10-30 YRS 26,1bp (-0,7).
2 YRS German BKOs closed 0,10% (-3) and 5 YRS OBLs 0,61% (-6).

Main at 149 from 144 (3,7%, in line wit equities); Financials at 262 after 255 (2,5%). SovX at 285 from 283. Cross at 692 from 675.
Main has 155 50% retracement. Cross past 686 retracement.

Stoxx Futures at 2183 / -3,1% (from 2253) with the S&P at 1362 (-1,7% from 1385, at European close).France’s CAC now negative 2% on the year. EuroStoxx -3%. Italy about -8% and Spain’s IBEX now past -20% YTD.
VIX index at 20,1 after 17,6 Friday same time.

EUR 1,313 after 1,321. Surprisingly stable – after all...                                                                        
ECB deposits up EUR 29bn to EUR 775bn
Oil 102,0/117,6 (WTI/Brent) from 104,6/119,5 (-2,4%/-1,6%). Gold at 1632 after 1645 (-0,8%). Copper at 361 from 369 (-2,0%). CRB closes 298,9 from 301,4 (-0,8%).
Baltic Dry up another 2.2% to 1090 from 1067.
All levels European COB 17:30 CET

Hmmm… More possible auction tension: Spanish 3 and 6m bills auction announced on the cautious side with EUR 2bn pencilled (versus EUR 3bn the last time)(Came at 0.38% and 0.84% one month ago). Up to 2.5bn 2 YRS zeros in Italy (2.35% one month ago). Up to EUR 2.5bn Dutch 2 YRS. The bond was trading 0.45 to 0.50% over the last month and has widened to 0.58% today.
French consumer confidence fact 87 after 87. Spanish mortgages and budget balance.
Raft of US figures with CaseShiller home prices. Consumer Conf fcst 69.6 after 70.2. New home sales fcst 320k after 313k.

Rest of week:
Once more, heading into month end, a thin week for hard data, leaving markets probably trading more on sentiment (broken) and technicals (bad). Will need to follow closely post first election round price dynamic on the French debt, as well as Italy and Spain.
Have other Italian tests with bills (Thu) and bonds (Fri). German 30 YRS on Wednesday to enhance duration…

Germany: nothing until CPI on Thu (fcst 2.2% after 2.3% YoY), Consumer confidence on Fri
France: Employment on Thu, PPI and Cons Spend on Fri
Other EU: EZ confidence figures on Thu.
SP Retails sales and Unemployment on Fri. IT Biz conf Thu and retail sales Fri.
US: Housing & Consumer Conf Tue. Durable goods and FOMC on Wed. Jobs and home sales on Thu. GDP and Mich conf on Fri.
Asia: Japan Small Biz conf Tue. Machinery orders Wed. Industry activity Thu. Busy Fri with Indu Prod, Retail and Construction. China Leading indicator on Tue.

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