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 5 September 2012

05 Sep 2012 – “ (Shake, Shake, Shake) Shake Your Booty" ( KC & The Sunshine Band, 1976)

05 Sep 2012 – “ (Shake, Shake, Shake) Shake Your Booty" ( KC & The Sunshine Band, 1976)

Flat opening quotes to start the day in Europe. EGBs mostly unchanged. Equities up 0.25% from the sell-off close yesterday evening, as US equities regained some colour later in the session (although, mostly driven by Apple, surprise, announcing its upcoming conference). Asia softer overnight,  trailing Europe and chewing softer Chinese Service MI at 52 after 53.1 and Australian Q2 GDP popping up softer than expected (+0.6% against +0.7 fcst after Q1 revised up a tick to 1.4% QoQ / 4.4% YoY).

Not much else to kick off the day. Will await the German Bund auction, as well as possible further leaks and comments from the political European criss-crossing meetings. “En attendant Mario”. Keep in mind, though, that Beckett’s play ends with a broken belt and some more waiting…

Final PMI data a reminder that while things seem to bottom out somehow in the Periphery; we remain in a seriously contracting environment on a larger scale: Composite revised lower to 46.3 and Services to 47.2 (flash were 46.6 and 47.5 after 46.5 and 47.9). Final August German Services PMI confirmed at 48.3 ( prior 50.3), French revised 1 point lower to 49.2 (prior 50.0), Italy revised slightly higher to 44 from 43.3 after 43) as was Spain’s at 44 from 43.4 (43.7 in July).
EZ July Retail Sales as expected -0.2% MoM / -1.7% YoY with June revised up to +0.2% from +0.1% MoM and from -1.2% to -0.9%. Makes the drop just more depressing.

Had bit of further Risk Off pressure on that basis. Overnight weakened EUR pushed to test 1.25 and equities down 0.75% from early morning quotes / 0.5% from close. Credit softer after yesterday’s relative outperformance. EGBs in usual ROff torsion around the Soft Core (-3 / +3): bit better on the Core, bit softer in the Periphery. Italian short end soft, too.

Lasted until the German auction failed, miserably, with solely EUR 3.9bn in bids for targeted EUR 5bn sales. EUR 3.6bn issued with the BuBa retaining EUR 1.4bn. Average yield 1.42% (unchanged from August last increase). 4 bp to the outstanding July 2022. 
While technically, the Bundesbank only acts as agent, and discards the retained amounts in market interventions, this will certainly trigger talks of debt monetization and some Schadenfreude elsewhere. Hadn’t had that for a while, but in absence of a very strict Primary Dealer organization, this has happened before. Last time for 10s in April 2011, for 5s in Sep 2011 and for 2s in Nov 2011. Such results should therefore not be over-interpreted.
This bond might actually become rapidly delicate to trade, given the squeeze potential at any given hick-up.
Trigger for a Risk On move in equities – but what have equities ever realty understood of bonds? So no ROff torsion anymore, but all EGBs at +2 at the end of the morning, as Bunds traded off 3 bps.

Otherwise on the EGB side, the Dutch took the USD route and closed a 3 YRS auction at MS +5 with over USD 7bn in (large) orders. This in turn triggered a Belgian shotgun mandate for a 3 YRS USD deal for same-day execution with an initial MS +low 50 guidance (EUR 3 YRS spread is about 45), eventually was closed at MS +50 for USD 1.25bn.
Good timing to scoop up the USD 4bn of redeeming Germany USD bonds on 21 Sep.
As comparables 3 YRS UK Mar 2015 is at MS -13, KfW Apr 2015 minus low single digit, Finnish Oct 2015 about flat to swaps.

Toss-a-coin Spanish auction tomorrow with EUR 3.5bn 2-4 YRS (3.4% Apr 2014, closing today at 2.96%, 4% Jul 2015 @ 3.90% & 4.25% Oct 2016 @ 4.85%). Last Spanish shorter auction was on 05 July with 3s at 5.086% and Oct 16 at 5.54%. Results around 10:45 CET. 
French OATs as well with EUR 8bn Oct 2017, Apr 2022 (last 2.3% in July) and a new 15 YRS Oct 2027 benchmark (COB levels 0.88%, 2.23% & 2.86%) French results 11:00 CET.

Had comments out of Germany’s CDU party re-spoil the party in equities a little with EGBs finally inverting their torsion the other way round with Bunds wider by 2, still hurting from the auction, albeit in subdued emotion (given the above mentioned precedents) and the Periphery now tighter a couple of ticks with Spain hovering just above the symbolic 6.500%-mark in 10s. Periphery short end running out of steam and 2-10s flatter by 10, respectively 15 from yesterday’s record steep curves.
Credit unchanged. Commodities about unchanged. EUR unchanged.

After lunch dessert with further “Draghi leaks” of “Monetary Outright Transactions” (Moths??? Like those burning up on light bulbs??? Or like in “to mothball”, buy and store?): 
Discretionary, unlimited amounts, sterilized (there are EUR 800bn plus in ECB deposits and Current Accounts, so sterilizing has room to go before getting stopped), no cap, up to 3 YRS and no seniority. Conditionality, of course.
That the ECB could sell the bonds in case of non-compliance seems like an impressive bazooka to the sovereigns’ heads, but sounds utterly unconvincing... 
But it’s only a blue print (What about the other already bailed-out countries? What about the seniority on Greek holdings? Other types of non-sovereign securities?)
Whatever, it stirs the spirits and adds (limited) volatility: up / down in equities & down / up in Bunds – and back to square 2, meaning midday levels ahead of US figures with final Q2 NF productivity higher than expected at +2.2% (fcst 1.8% from 1.6%) and Unit Labour Costs at 1.5% (fcst 1.4% after 1.7%).

Gave some traction to Periphery (longer) bonds, though, with Italian and Spanish 10s down another 5-7 to -12 and -9 on the day. 2s on stand-still or even a bit wobbly in both countries. 
And, honestly who wants to pay again double or nothing on Spanish auction cum ECB day (as reminder 05 July: Spanish 10s +37bp, 02 Aug +50 bp).
Risk On in equities and credit on the back of that anyway. EUR back up to 1.26.
NY ISM at 51.4 after 55.2 in July a bit of a dampener for US equities, after all. Up. Down. Down. EUR 1.259
Merkel backing both Draghi AND Weidman. No contradiction in dual support. Up. Down. Up. EUR spikes 1.262
Merkel is said not to like unlimited, but rather temporary (short end) buying. And down…EUR 1.258. Nice equity / EUR sync.
Oh, and that was all second-hand reporting…
EStoxx futures crossed the closing line over a dozen times today (HiLo 1.75%, but average right on closing level).
Had finally a magnitude 7.9 earthquake off Costa Rica and Caribbean Tsunami warning (later widened, then cancelled), as well as news of a fire at French nuclear plant Fessenheim as final downer.
“Unidentified sources” in the know the ECB won’t discuss rate cuts, as crossed the wires, gave equities the final push lower back to yesterday’s closing, but propped the EUR. Up. Down. Up. Down.
Choppy close all over.
Shake shake shake!

(New) Bunds closed at 1,48% (+6), OBLs at 0,39% (+4) and BKOs -0,015% (+2).“Old” Jul 22 Bunds closed at 1.44% (+4).
Spanish 2s closed at 3,03% (+2) and 10 YRS BONOs at 6,38% (-16). Spanish 2-10s 335bp (-18). Italian 2-10s 318bp (-23). Another good day for the Periphery on the long end. Short end running out of steam. Late low Spanish 10s was 6.05% on 22 Aug.
Equities in final plus, but Credit surging ahead (over 2% tighter).

Mario on the ticker tomorrow.

New Issues still bubbling, although in less ebullient manner than yesterday’s cumulated EUR 13bn prints: EUR SSA supply restricted to French OSEO EUR 1.25bn of short 10 YRS at OAT +23 / MS +76. Corporate deals for Linde with EUR 1bn 8 YRS at MS +35, Telefonica EUR 750m 5 YRS at MS +485 and France Telecom EUR 500m Mar 2023 at MS +80. Another sub bank deal with SE Banken EUR 1bn Tier 2 10nc5 YRS at MS +310.

Closing levels:
New Sep 2022 as German ref (Jul 2022 +4)
10 YRS Yields: Germany 1,48% (+6); Luxembourg 1,61% (+3); Finland 1,74% (+2); Swaps 1,76% (+3); Netherlands 1,82% (+5); EU 1,91% (+4), Austria 2,04% (unch); EIB 2,16% (+6); France 2,23% (+2); EFSF 2,44% (+5); Belgium 2,65% (+2); Italy 5,59% (-15); Spain 6,38% (-16).

10 YRS Spreads: Luxembourg 13bp (-3); Finland 26bp (-4); Swaps 28bp (-3); Netherlands 34bp (-1); EU 43bp (-2); Austria 56bp (-6); EIB 68bp (unch); France 75bp (-4); EFSF 96bp (-1); Belgium 117bp (-4); Italy 411bp (-21); Spain 490bp (-22).

EUR swap curve 2-5 YRS 45bp (unch); 5-10 YRS 80bp (+2,0) 10-30 YRS 53bp (+2,0).
2 YRS German BKOs closed -0,015% (+2) and 5 YRS OBLs 0,39% (+4).

Main at 140 from 143 (2,1% tighter); Financials at 233 after 239 (2,5% tighter). SovX at 219 from 225. Cross at 558 from 569.
Stoxx Futures at 2441 / +0,3% (from 2433) with S&P minis at 1404 (+0,4% from 1398, at European close).
VIX index at 17,6 after 18,6 yesterday same time.

Oil 94,9/113,6 (WTI/Brent) from 95,3/114,8 (-0,4%/-1,1%). Gold at 1694 after 1692 (+0,1%). Copper at 353 from 347 (+1,7%). CRB at EU COB 308,0 from 309,0 (-0,3%).
Baltic Dry on now usual slide towards its late lows, now at 684 after 693. Another 5.4% until hitting the Feb low at 647. 

EUR 1,261 from 1,257

ECB deposits at EUR 342bn after EUR 341bn.

Greek bonds guesstimates: 2023s paring late performance at 21.75% after 21.50% and 2042s stable at 18.50%.

All levels COB 17:30 CET

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

EZ: Fri Q2 GDP fcst -0.2% unch
Germany: Thu Jul Factory Orders fcst +0.8% MoM after -1.7%
France: Fri Q2 Unemployment 10%
Spain: Fri Ind Output fcst -5.2% Jul after -6.3% YoY
US: Wed Final Productivity & Unit Labour Costs & NY ISM; Thu ADP Employment fcst +143 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:
Aah, You can, you can do it very well.
You're the best in the world, I can tell.

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