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 4 September 2012

04 Sep 2012 – “ Shake Your Moneymaker " (Elmor James, 1961)

04 Sep 2012 – “ Shake Your Moneymaker " (Elmor James, 1961)

Split open in Europe after yesterday’s evening surge on the Draghi up to 3 YRS buying “leak”, as equities are giving back 0.25%, while in EGBs, after initially ticking firmer, were shoved into Risk On modus (3-4 bp softer). Spanish bonds tighter by over 10bp across the curve (keeping the record steep 2-10 spread of 340), while Italian short end bonds outperformed the longer end (moving Italian 2-10s about 10 wider to 335). Credit indices in ROn as well with a 2% plus tightening.
Moody’s negative outlook on the EU all but ignored (then again the EU, as well as EIB have been put on negative outlook by S&P in January).

All is well! Nothing has been done for real so far in terms of interventions, but by now Italian 2s have come back down to below 2.50%.
Knowing that the average 2 YRS BKO yield since 1999 has been 2.70% (1.62% for the last 5 YRS and 0.91% since post-Lehman 2009 with a top at 1.91% in April 2011). For France, the picture is rather similar with a post EUR introduction average of 2.83%, last 5 YRS 1.83% and 2009-onwards average of 1.14% and one will notice a rather consistent long-term average spread of roughly 20 basis points.
So, very obviously there is still some compression margin, but where would one decide to put the credit spread, both real, be it simply from a rating or credit quality point of view, or “perceived”, from a (real) default possibility point of view or even from the shunned convertibility point of view? Italian 2s are now roughly at 240 over Bunds / 225 over France with Spain about 90 bp wider. How much tighter should be an “unfragmented” EZ?
Other question: What if the long-end doesn’t follow, despite massive possible roll-down gains? Better a recurrent roll of short maturities than no funding at all, but it won’t make things easier on the long term, will it?
Questions over questions… Wait-and-see time spending strategy until next Thursday.
Talking of non-standard measures, we note that ECB deposits, since crashing down after the ECB cut its rate to zero, have become a quite boring thing to watch, averaging EUR 335bn with only limited volatility.

Not much data to speak off, outside further soaring Spanish unemployment, which added over 38k jobless in August, the first rise since April, as the tourism season helped to lower numbers through July.
EZ PPI rose above consensus to 0.4% MoM / 1.8% YoY (fcst 0.2% after -0.5% / 1.6% after 1.8%), confirming some stickiness in price rises seen in the CPI data, too. Hawk fodder to keep main ECB rates unchanged on Thursday.

Massive New Issue supply in the morning, profiting from the increased mood (see below) – and low risk government supply limited to Austria selling EUR 550m of 5 YRS at 0.829% and EUR 660m 2019s at 1.344% with the bill side occupied by Belgium with EUR 1.3bn 3m at -0.021% (after prior -0.012%) and EUR 1.3bn 6m at 0.004% (after +0.002%) and the EFSF with EUR 2bn 3m at -0.045% (after -0.022%).
Greece, still a side-show these days, sold more than the targeted EUR 875m with EUR 1.14bn of 3m bills at 4.54% (after 4.68% in August).
All is well!

New 10 YRS 1.500% 04 Sep 2022 Bunds on tomorrow. Will become the newest reference. Trades about 3bp to July 2022. Last auction was at 1.42% early August.  ISIN DE0001135499
French OATs on Thursday.
Toss-a-coin Spanish EUR 3.5bn 2-4 YRS on Thursday morning will be the one to focus on.

Noon levels showing a disparate picture of slight ROff in equities (down about 0.5%), a flattish EGB curve (but for the new Finland deal sticking out as heavy), after initial weaker Hard Core. Periphery driven by hyped-up Spanish 2s, which tightened by over 30bps, pulling 10s tighter by over 20, as 2-10s held the 350 mark. Italy better in tag-along. Credit eventually paring some of the morning strength.
Commodities and EUR roughly unchanged from closing levels.

Interestingly, Bank of Italy responded to my questions about the fair spread in the afternoon, stating that fundamentals and fiscal outlook suggest 200 basis points over Bunds in 10 years (180 in 2s and 270 in 5s). The rest is convertibility risk… Opening offer to the ECB? Ready to haggle?
ECB Asmussen stating at about the same time that these spreads were unacceptable, as resulting of a EUR-break up pricing. Convertibility back on the table.  “The risk premia of sovereign bonds don’t only reflect the default risk of individual states but also an exchange-rate risk, which shouldn’t technically exist in a currency union. Markets are pricing in a breakup of the euro area. For a currency union, such systemic doubts are unacceptable.” Hence the calls for a fiscal union…which he calls upon, too, as the whole speech ends with the statement that Banking Union cannot solve all imbalances and that there’s a need for 1) fiscal union, 2) Economic Union and 3) democratically legitimate political Union to move on. Otherwise, ditch it. Uh, that’s a mountain of conditions. 

No early afternoon US figures, which were misses on a softer open anyway. Final US PMI at 51.5 (flash 51.9), followed by Manu ISM at 49.6 (fcst 50 after 49.8) and surprising Px ISM at 54 (fcst 46 after 39.5). Construction Spending fell unexpectedly 0.9% MoM (fcst was 0.4% unch). Pushed S&P below the 1400-mark. And no immediate QE in sight. Where are Central Bankers when you need them? Tsss. Has some dubious “Japan ambassador shot in China” rumours circulated as explanation for the weakness (stupid twitter hoax), but some correction was probably overdue with equities anyway less confident at these levels. So that one was just good excuse. S&P 50d MOV and 100 actually only at 1378 (1.5%) and 1361 (2.8%)
Good kicker for EGBs.

Final leak of the day from Draghi:  “Frankly, all this also has to do very much with the continuing existence of the euro.” Can be viewed in all possible ways. Would tend to see it the Asmussen sense of a need for the Full European Monthy.

Bunds closed at 1,40% (+2), ahead of tomorrow’s auction, OBLs at 0,36% (0) and BKOs -0,037% (+0,2).
Spanish 2s closed at 3,01% (-43) and 10 YRS BONOs at 6,54% (-30). Spanish 2-10s 354bp (+14). Italian 2-10s 341bp (+15).
Good day for the Periphery. Equities decoupled from that, though.

New Issue flood. Take what is possible, as one never knows: GIPPS issuers in senior financials and corporates via ENEL EUR 1bn Mar 2020 at MS+360 (some 15bp through BTPs), UniCredit EUR 1bn 3.5 YRS MS +390, ESB (Irish Electricity) EUR 600m 5 YRS at 6.25% (or about MS +525, some good 100 over Ireland).
A further raft of corporates with a chunky EDF EUR 2bn long 10s at MS +105, Daimler EUR 750m 10 YRS at MS +77, Volkswagen with a EUR 500m 2 YRS FRN at E +35 as well as Swedish SKF with EUR 500m 7 YRS at MS +60.
SSA supply courtesy of a massive German GG FMS issue with EUR 2.5bn Jan 2020 at MS +10, Land NRW with EUR 500m 10 YRS at MS +14, KfW with a EUR 750m 7 YRS FRN at E flat and the City of Stockholm with EUR 500m 10 YRS at MS +45. Further supply coming from a EUR 750m increase of Romania’s 2018 benchmark around MS +400.
Finally, Austrian Raiffeisen LB NÖ closed EUR 500m of 5 YRS covered bonds at MS +42 and Deutsche Pfandbriefbank with a EUR 500m 3 YRS senior deal at MS +195.
To round this off, Rabobank issued EUR 1bn 10 YRS LT2 at MS+245, next to GBP 500m LT2 15 YRS at UKT +305.
Total EUR supply of the day: EUR 13.35bn… Wow…

Closing levels:
10 YRS Yields: Germany 1,39% (+1); Luxembourg 1,58% (+0); Swaps 1,73% (-2); Finland 1,71% (+4); Netherlands 1,77% (unch); EU 1,87% (+1), Austria 2,03% (-1); EIB 2,11% (+1); France 2,21% (+1); EFSF 2,39% (+1); Belgium 2,63% (+2); Italy 5,74% (-11); Spain 6,54% (-30).

10 YRS Spreads: Luxembourg 19bp (-1); Swaps 34bp (-3); Finland 32bp (+3); Netherlands 38bp (-1); EU 48bp (+0); Austria 64bp (-2); EIB 72bp (+0); France 82bp (unch); EFSF 100bp (unch); Belgium 124bp (+1); Italy 435bp (-12); Spain 515bp (-31).

EUR swap curve 2-5 YRS 45bp (-1,0); 5-10 YRS 78bp (+unch) 10-30 YRS 51bp (+3,0).
2 YRS German BKOs closed -0,037% (+0,3) and 5 YRS OBLs 0,35% (unch).

Main at 143 from 145 (1,4% tighter); Financials at 238 after 240 (0,8% tighter). SovX at 225 from 231. Cross at 568 from 233.
Stoxx Futures at 2436 / -1,0% (from 2460) with S&P minis at 1398 (-0,7% from 1408, at European close).
VIX index at 18,7 after 17,5 yesterday same time.
Oil 95,6/115,1 (WTI/Brent) from 96,7/115,5 (-1,1%/-0,4%). Gold at 1693 after 1693 (0,0%). Copper at 347 from 349 (-0,6%). CRB at EU COB 310,0 from 310,0 (unch).
Baltic Dry now at 693 from 698 from 703, another 6.6% until hitting the 647 Feb low. 

EUR 1,256 from 1,260

ECB deposits at EUR 341bn after EUR 346bn.

Greek bonds guesstimates: 2023s down further to 21.50% from to 22.75% and 2042s down to to 18.50% from 18.75%.

All levels COB 17:30 CET

This Week:
ECB on Thursday.
Spanish 2-4 YRS auction on Thursday, just hours before the ECB meeting, probably the most exciting govie auction of the week.
US NFP on Friday.

EZ: Wed Final Serv & Comp PMI Retail Sales  Fri Q2 GDP fcst -0.2% unch
Germany: Wed Final Serv PMI 48.3 Thu Jul Factory Orders fcst +0.8% MoM after -1.7%
France: Wed Final Serv PMI 50.2 Fri Q2 Unemployment 10%
Italy: Tue Final Serv PMI
Spain: Fri Retail Sales (-5.2% Jul)
US: Wed Final Productivity & Unit Labour Costs & NY ISM; Thu ADP Employment fcst +145 after 163k ;Claims fcst +370 (from 374k) Non Manu ISM fcst 52.5 after 52.6, Friday NFP fcst +125k (after 163k), Unemployment fcst unch 8.3%

Click link on title or below for today’s musical support:
Need to shake someone…
Original footage not readily available. Have Black Crowes and his Highness Jimmy Page as stand-in…

Still, here’s the original:

And the Fleetwood Mac version

As well as Eric Clapton & Jeff Beck

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