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

Thursday 30 August 2012

30 Aug 2012 – “ For Heaven’s Sake " (Frankie Goes To Hollywood, 1986)

30 Aug 2012 – “ For Heaven’s Sake " (Frankie Goes To Hollywood, 1986)

Did I miss not being behind my screens for the last 10 days? Nah! Had some great quality time with my family.
Did I miss anything??? Naaaaaaaaaah!
By and large things weren’t that much different yesterday evening than 2 weeks ago. Obviously the summer lightness of being and associated complacency have started to wane; and as much I thought that 6.40% in Spanish 10s was too near to 6.50% and then subject to small acceleration spurts 6.750% (+3.8%) and then 7% (+ additional 3.7%), we’ve already hurdled the first symbolic mark this morning.
New Supply out of Finland and from the EFSF in 10s explains corrections in my numbers with new Finnish 10s trading 7bp over the my old interpolated reference and the yesterday’s EFSF issue pricing on the upper end of range with some new issue premium against the already discounted former reference. Credit indices by and large unchanged, as are most commodities. European equities a bit softer with the reversal of the daily small grind on shorts we witnessed in the first half of August, which has become a daily grind on longs. Given the absence of wider volatility (yesterday’s excruciating 7 ticks HiLo in the S&P looks torrid, until you realize that these were 7 ticks…).
Major movements hence only in Hard Core EGBs with Bunds back in the 1.30s after flirting with the 1.60% barrier 2 weeks ago; Gold looks like a decent flight into the unknown and is up over 2.5%; the EUR, of course, looks healthier above 1.25 then when it was flirting on the 23 handle; and with stable Oil, Brent paid in EUR at 90 looks less threatening than over EUR 94 per barrel. Finally, despite the painfully low volatility and lack of volume, VIX seems to wake up to September / October uneasiness and has staged a healthy comeback. Italian and Spanish curves are marginally steeper than 2 weeks ago, with the short end not performing in mind-blowing manner, but upheld by the possible ECB buying outlook. Tuesday’s Spanish bill auction fared well. Still, we all know that the Periphery won’t be able to sustain to fund itself on the short end only infinitively…

Quite obviously, most eco data out of Europe and Asia has been poor to depressing, while the US seem to fare better, at least on housing numbers, which makes the EUR recovery all the more surprising, but markets still caught in the pre-summer break cliff hanger of Draghi’s promises, like viewers between 2 seasons of “24 hours”. In the US, good is not necessarily good for risk as the main driver to the upside had been QE3 hopes that seriously look like they won’t materialize anytime soon.
In any case, Season 2 will start soon with Jackson Hole around the corner and the ECB next week. Not sure that the markets will be satisfied. How many aces can the Central Banks still hide up their sleeves without looking like Popeye the Sailor? And remain credible? In an overleveraged economy that deleverages, there’s just so much you can do. Put stabilizers left and right and try to feather the fall. Pumping up forever, especially against headwinds, won’t do; especially if politics won’t lead changes. Upcoming calls from Ben and Mario to the governments? Get your act together, there’s just so much that can be done.

In the meantime, Spanish CPI remains sticky at 2.7% YoY (after 2.2% and a tick higher forecast), as was Germany’s yesterday at 2.2% (after 1.7% and 1.9% fcst). German unemployment remained stable as foreseen at 6.8%, although the number of unemployed grew by 9K (fcst 7K after 7K revised to 9k). Talking of CPI, Belgian numbers showed as well an increase to 2.9% YoY. Even if higher commodity prices will explain part of that, fact is prices are on the rise. Fodder for the Hawks.

On the auction front, the new Italian 10 YRS benchmark got a fair reception with EUR 4bn sold at 5.82% (about 8 bp above the former reference), compared to 5.96% for the former on-the-run last month. Had as well EUR 2.5bn 5 YRS sold at 4.73% versus 5.29% with 1.5 B/C.  Bid to cover of 1.4 versus 1.3 in 10s, and in 5s, is marginally better, but not exactly ecstatic. It’s rather a show of a disciplined primary dealer group. Closes EZ EGB supply for August. CU back in Sep for real action.

Midday levels in Risk Off torsion: Bunds down 5bp to 1.33%, Soft Core & Agencies about unchanged, Periphery wider by a good 10bp to 5.87% (new Italian reference) and 6.54% for Spain. Spanish and Italian 2-10s a tick steeper in low 290s, mainly on long end weakness. Credit wider, equities down 0.5%. Commodities about unchanged, as for the EUR.

Nothing really crispy on screens. To add to the heavy early Sep calendar (06 Sep ECB, 12 Sep German Constitutional Court ESM ruling and Dutch elections), the EU will publish its Banking Union proposal – on broad 27 basis (knowing that it cannot turn into working reality before ages anyway).
It’s probably not worth delving too much on Chinese assertion of interest in “European” bonds. There are these and those and others. They’ll rather stick to the cautious side. Yesterday’s rather difficult EFSF issue eventually was placed with 5% in Asia.
On the Spanish front, things officially don’t seem to move, although 3 regions have already signalled total interest for up to EUR 9.2bn out of EUR 18bn of the regional bail out fund (of which EUR 6bn is to be funded via the Lottery taking up a loan). Here, conditionality seems as much a (non-)subject as for Spain itself. But then again, if no one wants to abide to conditionality, Draghi is off the hook.

US data with Personal Spending 0.4% a tick below consensus; Personal Income at 0.3% as foreseen but previous revised from 0.5% to 0.3%; Claims at 374k above 370k consensus with previous data raised to 374k from 372k and Continuous Claims at 3316k above 3307k consensus with previous data revised up from 3317k to 3321k. Growth without jobs… Not bad enough for QE and anyway that can’t be changed by QE.

Rajoy- Hollande meeting. Rajoy - Euro irreversible, but need to put an end to differences in EZ countries' borrowing costs.  Spanish region’s bail-out demand no surprise, by the way…Who’s next among Spain’s contingent liabilities? Hollande - In the name of monetary policy, there can be interventions when there are such big differences in borrowing costs within the EZ. 
Oh, and integration talks are now in December… 
Looks like the coming weeks will remain full of words ending with “y”: irreversibility, convertibility, seniority. Frilosity?

Heavy US open with the S&P finally back through the 1400-mark. With VIX shifting to 18 and, given the late complacency and lack of volatility, any 1%-plus correction will suddenly trigger more. And all European equity markets are still very much in the green MTD. Hold on tight.

ROff close. Bunds at 1.32% (-6). (New) BKO at -0.042% (-3.5). OBLs at 0.32% (-6). Had EUR ticking below the 25-handle.
Spain at 6.57% (+14). New Italy 5.87%. Old ref 5.77% (+1). Italian 2-10s 299. Spanish 2-10s 294. Spanish 2s 3.63%.
Spanish 2s 3.66%.

Healthy corporates New Issues traffic after the late SSA wave (although either Core or non-EZ): Siemens with double double-trancher EUR 400m 2 YR MS -10 (after initial swap plus talk), EUR 1bn 7.5 YRS at MS +20, as well as GBP 350m 13 YRS and GBP 650m 30 YRS. EUR 500m Holcim 8 YRS MS +120 (BBB flat name) and EUR 1bn Fortum 10 YRS at MS +65.

Closing levels:
10 YRS Yields: Germany 1,32% (-6); Luxembourg 1,52% (-5); Swaps 1,69% (-5); Finland 1,72% (+1); Netherlands 1,73% (-5); EU 1,80% (-4), Austria 2,04% (-2); EIB 2,04% (-2); France 2,15% (+2); EFSF 2,31% (+0); Belgium 2,56% (+0); Italy 5,87% (+11); Spain 6,57% (+14).
Note new references for Finland, EFSF and Italy.

10 YRS Spreads: Luxembourg 20bp (+1); Swaps 37bp (+1); Finland 40bp (+7); Netherlands 41bp (+1); EU 48bp (+2); Austria 72bp (+4); EIB 72bp (+4); France 83bp (+8); EFSF 99bp (+6); Belgium 124bp (+6); Italy 455bp (+17); Spain 525bp (+20).

EUR swap curve 2-5 YRS 43bp (-6,0); 5-10 YRS 77bp (-7,0) 10-30 YRS 47bp (+1,0).
2 YRS German BKOs closed -0,042% (-3,5) and 5 YRS OBLs 0,32% (-6).

Main at 151 from 147 (2,7% wider); Financials at 251 after 246 (2,0% wider). SovX at 233 from 230. Cross at 596 from 583.
Stoxx Futures at 2408 / -0,9% (from 2430) with S&P minis at 1399 (-0,5% from 1406, at European close).
VIX index at 17,8 after 16,9 yesterday same time.

Oil 94,3/112,5 (WTI/Brent) from 95,0/112,1 (-0,7%/+0,4%). Gold at 1656 after 1657 (-0,1%). Copper at 344 from 344 (unch). CRB at EU COB 306,0 from 306,0 (unch).
Contrary to the trend that we saw 2 weeks ago, the Baltic Dry seemed to have eventually bottomed out above the 647 Feb low, just ticking down to 709 from 714 in a couple of days and since then trailing mainly sideways. Baltic Dry at 707 from 718 yesterday, a new late low on its way to the 647 Feb low. Had hit 709 Tuesday last week.

EUR 1,250 from 1,254

ECB deposits at EUR 334bn after EUR 332bn.
Monday’s ECB SMP figures, of course, didn’t show any increase. The total amount decreased by EUR 2.5bn to EUR 209bn, as the Greeks repaid their Aug bond with money previously raised via bills.

Greek bonds guesstimates: 2023s at 23.50% and 2042s at 19.25%

All levels COB 17:30 CET

Tomorrow and Coming Week:
US closed for Labour Day coming Monday, so Jackson Hole reaction, if any, probably on Tuesday.

EZ: Fri CPI fcst 2.5% after 2.4% Unemployment fcst 11.3% after 11.2% Mon Final Manu PMI 45.3 Wed Final Serv & Comp PMI Retail Sales  Fri Q2 GDP fcst -0.2% unch
Germany: Fri Retail sales fcst +0.2% MoM after -0.1% Mon Final Manu PMI 45.1 Wed Final Serv PMI 48.3 Thu Jul Factory Orders fcst +0.8% MoM after -1.7%
France: Mon Final Manu PMI 46.2 Wed Final Serv PMI 50.2 Fri Q2 Unemployment 10%
Italy: Fri Unemployment fcst 10.9% after 10.8% CPI fcst 3.6% unch PPI fcst +0.3% after -0.1% Mon Fin Manu PMI Tue Final Serv PMI
Spain: Fri Retail Sales (-5.2% Jul)
US: Fri Chic PM fcst 53.3 after 53.7 Factory Orders fcst +2% after -0.5% Tue Final PMI; Manu ISM fcst 49.9 after 49.8 ISM PX 47.5 after 39.5%; Constr Spending +0.5% after +0.4% Tue Final Productivity & Unit Labour Costs; Wed ADP Employment fcst +130k after 163k Claims (372K) Non Manu ISM fcst 52.5 after 52.6
Asia: Japan Indu Production fcst +1.7% after +0.4% MoM China Sat Manu PMI fcst 50 after 50.1 Mon HSBC PMI

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

We don't need recession (We don't need recession)
Or means of repression (Or means of repression)
Just give us some money (Just give us some money)
Our life could be sunny too
Just give us some money
Our life could be sunny too, ooh
She should stop and think, stop and think, oh
We don't need regression (We don't need regression)
Or means of repression (Or means of repression)
Just give us some money (Just give us some money)
Our lives could be sunny too, ooh

Any leak that MR has been heard humming this during his flights through Europe are obviously exaggerated.

And yes, they even played live! Well, probably sort of…Ok, they stood on stage.

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