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

Tuesday 3 April 2012

30 March 2012 – “Oops Upside Your Head” (The Gap Band, 1979)

Had the often witnessed US risk decoupling as soon as hysterical Europe headed home yesterday, lifting US equities back half a point to close about unchanged; a lead Asia seemed happy to follow to close Q1.
Contradictory Japanese numbers with better than expected PMI at 51.1 and housing, but negative Industrial production. Macro data saw German retail sales dropping -1.1% MoM against +1.1% fcst. French PP higher than expected at +4.3% YoY (fcst 4.0%) and surprisingly French consumption up 0.5% YoY against an expected -2.5% from prior -2.2%. Otherwise negative Spanish and Greek retail sales, Italian CPI quite above consensus at 3.8% YoY, as was the overall EZ CPI at 2.6% (2.5% fcst after 2.7%). If the ECB sees inflation falling at some time, it will need to wait a little. Not much else to chew on while awaiting US figures.

Europe opening on a less distressed mood with a bit of an uptick in risk appetite, but no strong rebound and with Bunds holding the level. Late morning saw the trend firm up a little. Italy recovering some 8bp against unchanged Bunds. Spain better, but less buoyant. Commodities a tick better with Gold swinging back.
Wait-and-see over lunch. Equities up 1%. Germany 2 bp softer. Commodities near or slightly above European COB. The one thing one will note is that credit is just a tick better in general, but that Financials gave up another 3 bp. In 10 YRS sovereigns, Italy and Spain corrected about half of yesterday’s widening. ECOFIN haggling ending with a compromise EUR 800m firewall.

No sovereign supply.

Interesting editorial in this week’s The Economist about France “being in denial” (link). Will make some people grind, but can certainly not be simply put off as being just another accustomed Anglo-Saxon “Frogger” attack.  Might in hindsight explain why late French confidence figures were all relative upbeat, as the mood has been marked by “crisis over” calls, while austerity urgency has been witnessed mainly on tv in news about the southern neighbours, who like it or not have started to bite the bullet. Concludes French spreads might be in danger, if the presidential debate doesn’t tackle future outlook and solutions. Seems obvious, but worth reminding.
Then again trading just shy of 3%, albeit 100 bp wider than Bunds, French 10 YRS are trading at / near historic lows (2.5% hit in Aug 2010 and Sep 2011) anyway. 5 YRS average is 3.66%, 10 YRS 3.84% and 4.13% since introduction of the EUR. As with German bonds, one should be aware that there’s a huge safe haven (safest forGermany) element in the actual levels. Although I wouldn’t give too much on Merkel’s sense of market timing (27 Mar 16:28 RXA 137.18, now 125 ticks higher) about when Bund yields will rise, she’s certainly right in commenting that yields will probably rise at some time, as the crisis ebbs, and no one should bet on and budget actual levels for ever.
So, one way or another, some caution is warranted here. When the wind blows…

Talking of austerity. No huge market reaction on Spain’s budget announcement. BONOs tightened back some, along Italy. Final 2011 numbers for Portugal: Budget deficit 4.2% (after 9.8% in 2010), debt/GDP 107.8% (after 93.3%). 2012 targets are -4.5% / 112.5% and -3% for 2013.

US figures didn’t bring nor changed much (Income a tick lower and prior revised a tick lower, balanced by spending a tick higher and prior revised higher, too. Deflator +2.3%). Chicago PMI a bit on the weak side at 62.2 (fcst 63 after 64), but balanced by Michigan Conf at 76.2 (fcst 74.5 after 74.3). NAPM of 51.8 way off 58 fcst. US open a tick higher and markets the freewheeling into the weekend with a slightly positive bias.

New issues time-out. Won’t probably see much strategic deals in the coming 10 days / 2 weeks, given the upcoming Easter period, bank and school holidays. Opportunistic SSA borrowing certainly possible. For corporates and financials maybe increases of exiting bonds.

-          ECB deposits up EUR 9bn to EUR 786bn.
-          VIX eventually closed back unchanged at 15.5 in the US, from 16.9 spike at COB Europe. 15.3 tonight here at close.
-          Oil 103.4 / 123.2 (+0.1% / +0.4% from 103.3 / 122.7 WTI / Brent). Gold back up to 1663 from 1648 (+0.9%), having already crawled back to 1660 by NY close. CRB remaining soft on the week but recovering to 309.4 from 307.8 (+0.5%). Copper actually doing ok at 382 from 378 (+1%).
-          Baltic Dry up 934 after 930.

-          10 YRS Yields: Germany 1,79% (-1); Swaps 2,28% (-1); Luxembourg 2,27% (unch); Finland 2,31% (-3); Netherlands 2,33% (-6); Austria 2,81% (-7); France 2,88% (-7); EFSF 2,94% (-2); Belgium 3,39% (-6); Italy 5,11% (-11); Spain 5,33% (-12).
-          10 YRS Spreads: Swaps 46bp (unch); Luxembourg 48bp (+1); Finland 52bp (-3); Netherlands 53bp (-5);Austria 102bp (-6); France 108bp (-6); EFSF 114bp (-1); Belgium 159bp (-5); Italy 331bp (-10); Spain 353bp (-11).
-          Italian bonds curve recovered about 10 bp across the curve, thus keeping yesterday’s negative flat bias. The CTZ auctioned on Tuesday at 2.35%, which got trashed to 2.88% yesterday, recovered to 2.83%. Spanish 5s in sync.

-          EUR swap curve 2-5 YRS 49,8bp (+0,8); 5-10 YRS 71,2bp (-1,2) 10-30 YRS 26bp (+0,2).
-          Main 125 (from 126) ; Financials, once more weak at 220 (from 217); Sovereigns 269 (from 274)
-          All levels European COB 17:30 CET.

On the week:

-                                        Some gloom was warranted last week and despite some, rapidly offset, Bernanke fever on Monday things trailed rather on the heavy side this week.
-                                        10 YRS Yields: Germany 1,79% (-7); Swaps 2,28% (-4); Luxembourg 2,27% (-5); Finland 2,31% (-8); Netherlands 2,33% (-12); Austria 2,81% (-8); France 2,88% (-6); EFSF 2,94% (-11); Belgium 3,39% (+3); Italy 5,11% (+8); Spain 5,33% (-2).
-                                        10 YRS Spreads: Swaps 46bp (+3); Luxembourg 48bp (+3); Finland 52bp (0); Netherlands 53bp (-5);Austria 102bp (-1); France 108bp (+1); EFSF 114bp (-4); Belgium 159bp (+10); Italy 331bp (+14);Spain 353bp (+5).
-                                        2 YRS BKO remained about floored at 0.21% (0.23% last week, 0.33% prior week), 5 YRS OBL a bit flatter at 0.80% (versus 0.88% last week, 1.07% prior).
-                                        Netherlands clawing back after last week flirt with the 60bp spread to Germany.
-                                        Austria and France acting a bit as pivot, yield and spread-wise. EFSF bonds still faring well, although starting to look rich compared to RAGBs and OATs.
-                                        Spread-wise things again wobbly on the periphery.
-                                        Belgium a little soft on periphery woes and syndicated supply. Should fare better given advanced stage of funding for the year.
-                                        Italy and Spain went really soft yesterday, flirting with 5.25% and 5.50% before regaining some colours.
-                                        Greece 2023 20.7% 2042 16.8% Portugal 2 YRS 13.2% 5 YRS 13% 10 YRS 11.2%

-                                        Last week’s index rolls triggered some volatility and need for rebalancing in credit. This week risk adverseness was more than shared with the Main closing at 125 (from 118, 5.9% weaker), Financials 220 (from 209, as well 5.3% weaker). Sovereigns, despite the jitters on Italy and Spain, held better on average, closing at 269 (after 280).
-                                        European equities coming from a new high 10 days ago, had another rough week, closing 2410 / -1.8% (from 2455 last Friday), while US equities were once more decoupling with the S&P up 0.9% at 1407 (from 1395). Stoxx up 6.8% YTD. S&P 11.9%
-                                        Like last week, the VIX mainly traded like a dead mattress for most of the time with feverish spikes once in a while (high 16), but closing about unchanged at 15.3 from 14.9.

-                                        EUR 1.333 from 1.326. Still pretty much without risk on / off barometer function.
-                                        Energy got hammered with Oil 103.4 / 123.2 from 107.1 / 125.5 (-3.5%/-1.8%). Gold fared okay-ish as haven closing at 1663 from 1661 (+0.1%), albeit with some swings. Likewise, Copper held pretty well despite the Chinese sell-off, closing up 382 from 380 (+0.5%). CRB 309.4 from 315.0 (-1.8%) with most weakness stemming from the Thu move.
-                                        WTI and Brent up 4.6% and 14.8% YTD. Gold 6.3%. Copper 11.3%. CRB only 1.4%, though.
-                                        Baltic Dry still in full recovery mode at 934 from 908 (+2.9%, after +6 to +7% the weeks before)

Next week should be on the light side with a 3-4 days Easter weekend pencilled in for most. Not sure, unless responding to news, there’ll be much repositioning to start Q2. Not much figure releases either.
German OBL, Spanish BONO and French OAT auctions. Spain to be monitored.
ECB, of course, with questions about LTRO2, inflation, Target2, pulling the plug on extraordinary measures. Interesting press conference to look forward to.
Might have a look on charts next week to see if one can read something out of them... Otherwise, tea leave reading is said to be fine, too.

German Mar PMI 48.1 fcst after 48.1 French PMI 47.6 fcst after 47.6 .IT PMI 47.6 fcst after 47.8 . US: ISM 53.1 fcst after 52.4.
Italian Budget figures as wildcard event.

Click link on title or below for today’s musical support:

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