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

Wednesday 6 June 2012

06 Jun 2012 – "Down Under" (Men At Work, 1981)

06 Jun 2012 – " Down Under" (Men At Work, 1981)

The cheerful news of the day: In a Galaxy far, far away, Growth has been found (The Economist link to the outer space trade deficit link)...But, no, wait! It’s just on another continent, far, far away... Oz surprised markets (and probably its own CB after yesterday’s rate cut to 3.25%) by posting an unexpected Q1 growth spurt of 1.3% QoQ / 4.3% YoY (after revised higher prior 0.6% / 2.5%). Good backdrop, alongside a mildly positive close in the US, bouncing a little from the lows and positive Japanese market reaction to what might have been discussed as yesterday’s G7 conf call. Question now is how to translate that growth over to Europe… (Then again, AC/DC made it big over here, too…). Ok, wishing for Oz growth contagion elsewhere...

Positive start in Europe, now with UK back on board, before having some of Northern Europe taking a day off tomorrow. Ongoing round of Moody’s bank downgrades (up to 3 notches) last night in Austria and Germany, widely ignored, although collateral posting issues after downgrade triggers won’t help to ease the bid on Core EGBs.
EGBs open about 2 bp softer with the Soft Core maybe a bit wider (French banks would probably be next on Moody’s list), equities up a small 1% and risk down 4 to 8, including financials. EUR back on the 25 handle. Commodities recovering lightly, as well, with Brent back on the 99 handle.

Spanish Apr IP down by 8.3% YoY, worse than the forecast to a -6.5% rebound after prior -7.5%. Back to Q4/2009 levels, which were then in a recovery phase. Final EZ Q1 GDP confirmed at 0%, unchanged to prior, minimal changes in break-down.

Switching into RISK ON ahead of the ECB meeting with a quarter cut definitively priced in. Stocks adding another 1% to hit 2% plus. EGBS moving to soft modus against a slightly stronger periphery, with yields dropping to below 5.50% and 6.25% for Italy and Spain, thus compressing spreads by a good 10 bp (below 500 for Spain).

EUR 5bn OBL auction weighting on German appetite under these conditions, but this auction fared better than previous ones that happened to have taken place on RISK ON days. EUR 5bn done, of which EUR 1bn was retained for market interventions. Bids for EUR 6.2bn, of which over EUR 2bn at market. 1ct tail. 0.41%, record low (Ok, that’s nothing exciting anymore…), after 0.56% last month. All-time lows were around 0.29% last Friday and at the open on Monday. 0.41% a pure opportunity, seen like this.
Had Portugal issue EUR 500m 6m at 2.65% (after 2.94% last month) and EUR 1bn 12m at 3.83% (after 3.91%). Decent and unchanged bid to cover ratios. Then again, given this week’s recaps, anything else would have been impolite from the dealers. This Portuguese bill sale is nevertheless a welcome change in Periphery news. Then again – already bailed-out…
German IP lunch time figures were quite disappointing at -2.2% (from prior 2.8%, revised sharply lower to 2.2%). Forecasts had been for a 1% decline.
Outside a Feb soft patch at -0.2%, this is the first negative YoY reading since Dec 2009. Putting a bid of lid on the buoyancy of the market and a floor on dropping bonds, ahead of the ECB verdict, which was … unchanged. Had surprisingly an only limited immediate impact.

Final Q1 Nonfarm productivity (slightly revised) and Labour costs (1.3% from first estimates of 2.1%) were the only major set of US figures, published right away to start the afternoon session.
Same timing as everyone switching on the Super Mario show. ECB press conference with Draghi not especially upbeat, stressing downside, downside, downside (Down under?), no real revelation… Nothing enticing during the call. Felt pretty passive-aggressive. Take-aways: Yes, markets are right to worry. No, there’s no deadline looming for fixing things – and it’s not the ECB’s job to do so. Yes, some council members did push for a rate cut today. BUT, it’s not all our fault (so to the G7/G20 ex EU: “Get lost! Fix your own problems, if you feel concerned...”).
Surprising market resilience, as if seen as show of strength, although it felt more like an attempt to keep powder dry....or good bluff.

Wizard of Oz wish fulfilled in Belgium with Q1 GDP expanding at 0.5% YoY. Knokke-Le-Zoute, new surfer Mecca and diving paradise...and witness accounts of kangaroos hopping around the streets of Brussels!  Need to hope for more Australian stimulus…

Tomorrow is auction day for Spain (2, 4 and 10 YRS) and French long end (EUR 8bn in 2019/ 2022 / 2026 / 2060). French and Spanish bonds surprisingly holding quite well. Maximum auction size has been set defensively at EUR 2bn for Spain. Last Spanish 10 YRS auction was in April at 5.74% (now 6.25%). Last French auction was at 2.96% last month (now 2.40%).
Still can’t make sense of Spain’s government calls: Yes, no, we need help, but not really; the FROB can recap everything, but it would be better if outside help was available, but we don’t need it anyway...

Weak data. Moody’s continuous bank downgrade. ECB non-action: RISK ON seems to get ahead of itself. Hard Core EZ bonds get a beating. FED probably to keep twisting. Equity squeeze and massive bond sell-off into the close. Even Italy sold and closing above 5.50%. Seems quite odd. Very odd.
Australian relaxed attitude face put on.

Slower start in New Issues with mainly CADES increasing a 12 YRS linker by EUR 1.5bn and German Joint-Länder #40 for EUR 1.5bn in 10s at MS +11.

Greek bonds guesstimates: Even Greece is getting carried away in the mood and in absence of fresh news. Greek 2023s down to 28.5% from 30% and 2042s to 23.5% from 25%.
Quotes were 20.25% and 16.75% before the elections.

Closing levels:
10 YRS Yields: Germany 1,32% (+12); Finland 1,71% (+13); Luxembourg 1,72% (+11); Netherlands 1,75% (+14); Swaps 1,77% (+10); Austria 2,16% (+7); France 2,40% (+8); EIB 2,45% (+12); EFSF 2,58% (+10); Belgium 2,85% (+4); Italy 5,52% (+1); Spain 6,25% (-2).

10 YRS Spreads: Finland 38bp (+1); Luxembourg 40bp (-1); Netherlands 43bp (+3); Swaps 45bp (unch); Austria 84bp (-5); France 107bp (-3); EIB 112bp (unch); EFSF 126bp (-1); Belgium 153bp (-8); Italy 420bp (-10); Spain 493bp (-13).

EUR swap curve 2-5 YRS 37,1bp (+4,3); 5-10 YRS 51,4bp (+2,6) 10-30 YRS 15,5bp (+0,4).
2 YRS German BKOs closed 0,06% (+5) and 5 YRS OBLs 0,46% (+10).

Main at 177 from 184 (-4,0%); Financials at 290 after 303 (-4,2%). SovX at 324 from 328. Cross at 713 from 738.

Stoxx Futures at 2135 / +2,5% (from 2083) with S&P minis at 1306 (+1,9% from 1282, at European close).
VIX index at 23,5 after 25,3 yesterday same time.

Oil 85,8/100,7 (WTI/Brent) from 84,1/98,7 (+2,0%/+2,0%). Gold at 1637 after 1619 (+1,1%). Copper at 335 from 331 (+1,4%). CRB closes 274,4 from 270,6 (+1,4%).
Brent back in shape and over the 100-mark.
Baltic Dry reopened with a low 878 fixing, after 904 last Friday (-2.9%). Is there another more convenient way to ship things from Oz to China???

EUR 1,252 from 1,246

ECB deposits at EUR 787bn after EUR 781bn.
End of maintenance period will be 12 Jun, so we might see some acceleration in the built up in the coming days. All-time high was EUR 828bn early March.

All levels Tuesday COB 17:30 CET

Rest of the week:
Tomorrow is auction day for Spain (2, 4 and 10 YRS) and in the French long end (2019/ 2022 / 2026 / 2060). Biggest periphery test this week, although the maximum auction size has been set defensively at EUR 2bn. Parts of northern Europe closed tomorrow.

Germany: Fri Import / Export & trade balance
France: Fri Biz Sentiment
Periphery: IT Fri IP, PMI
US: Thu claims, Fri Inventories

Click link on title or below for today’s musical support:
(“Can't you hear, can't you hear the thunder?/ You better run, you better take cove!” Pan flute solo...)

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