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 20 September 2012

20 Sep 2012 – “ No Fun " (Sex Pistols, 1977)

20 Sep 2012 – “ No Fun " (Sex Pistols, 1977)

The Thrill has gone, definitively. The S&P traded another excruciatingly slow 6-tick session, and that’s for the extremes, with most of the afternoon reduced to 2 ticks, before a “sharp sell-off” of 3 points in the close, leaving it still up a small 2 points. So… Weak Asian session on the back of slow Japanese data and yet another disappointing Chinese flash PMI, which, while edging higher to 47.8 after 47.6, showed the fastest drop in output in 10 months. Asian equities closing deep red with Japan down 1.5% and China minus 2% plus. Shanghai now at the lowest since early Feb 2009.
Risk Off backdrop for opening Europe. Equities gapping down 1%. Bund futures up 50 ticks. Bunds back through the 1.60% level, down 4 bp to 1.57%. Periphery in Pavlovian torsion out by 4-5, ahead of this morning’s EUR 4.5bn 3 and 10 YRS auction (opening levels of the bonds 3.90% and 5.70%, after closing 3.86% and 5.67%). Italy symbolically past the 5%-mark again, broken yesterday. UST down 6 bp to 1.72%. Credit wider, although Itraxx half-yearly index rolls make the reading a little blurred. Commodities generally weaker with Copper losing its late resilience. EUR down 100 pips from Asian trading, down to 1.295.

PMI disappointment round starting (Consensus was mostly for a bit of a rebound to show a bottoming out) with French Manufacturing down to 42.6 (fcst 46.4 after 46) and, more important, Services down to 46.1 (fcst 49.5 after 49.2). Late SPMI lows had been 45.1, 45.2 and 44.6 in May and April 2012 and before in Oct 2011. Before that Jul 2009 (…). Mfg PMI shows sharpest output fall since Apr 2009. Composite PMI down to 44.1 after 48.
At least German data had the decency to abide to (and overshoot) expectations with Services up over the 50-mark at 50.6 (fcst 48.5 after 48.3) and Mfg at 47.3 (fcst 45.2 after 44.7). German Comp PMI at 49.7, a 5-month high, after 47. Just below expansion mark. But then, it’s Germany. And it remains below 50… German PPI a tick over consensus at +0.5%/ +1.6% YoY (after +0% / +0.9%). Helped stabilize equities from the opening sell-off to around -0.75%.
PMI data was rounded up by EZ Comp at 45.9, missing the 46.6 consensus after 46.3, split into better Mfg at 46.0 (fcst 45.5 after 45.1) and worse Serv at 46.0 (fcst 47.5 after 47.2). Hadn’t had Comp below 46 since June 2009. Given, the high correlation, EZ 2012 GDP might end up in the -1% territory. Still, stabilized equities by another 0.25%. EUR sent spinning lower to 1.294.

This week’s most focused-on auction with EUR 4.5bn of Spanish new 3 YRS 3.75% Oct 2015 ES00000123P9 (opening 3.90% after COB 3.86%) and 10 YRS Jan 2022 (opening 5.70% after COB 5.67%) on the chop. Size amount was eventually beaten with a combined EUR 4.8bn, split into a large chunk of new 3s with EUR 3.9bn sold at average 3.845% (but with a stop-out rate of 3.92%) and EUR 860m 10s at 5.666% (stop-out 5.70%), meaning tails of 21.5 cts and 24 cts (7.4 and 3.4bp, respectively). Bid to cover in 3s at 1.6 and in 10s at 2.9, which is poor for the first, especially with the Draghi put, and looks rather fair for the later. Obviously, funding costs ARE lower than in the summer, down from off the run 3s at 5.09% in July, but up from early Sep’s 3.68%, and 10s at 6.65% early Aug.
10 YRS now back to Apr auction levels (5.74%). Lowest levels since 2011 were 5.16-20% in Feb/Mar and Sep 11.
Quotes in the immediate aftermath about stable 3.87% and 5.70% mid. 82% of planned 2012- mid- /long-term debt issuance now done. Glass was half-full until now, might turn half empty. Or just half…
French auction for a combined BTAN supply of EUR 7.97bn with EUR 3.2bn Sep 2014 at 0.20%,  EUR 1.3nn Feb 2016 at 0.53% and EUR 3.5bn Jul 2017 at 0.98% (COB 0.21%, 0.53% and 0.99%, from 0.12% in Jul and 0.86% in July in 2s and 5s). In line with yesterday’s close and Risk Off open. Had a 6 cts tail in 5s (1.3bp), though.
Funding costs higher than in Summer (Duh!). Given today’s PMI numbers and growth outlook, the French government will need to be furthermore creative to remain on target, especially with the Fiscal Compact / Golden rules passing government approval yesterday (Still needs to pass Parliament).
Closes auction supply for the week. 10 YRS Bunds next Wed and long Italians to close the month next Fri to focus on. Italian and Spanish bills next Wed and Thu shouldn’t be market-rocking in the current environment.

Had the EU on the ticker still pushing for Banking Union to start early 2013, which is unrealistic. First steering committees, maybe. ECB Coeuré repeating all that has been said before in defence of the OMT. That Central Banks have an unlimited capacity to create money is an illusion, though. As shown by the last few weeks of QE or similar announcements… 
Thus this mean they only have an unlimited capacity to buy bonds? Ok, that’s mean. Message goes to the governments in charge (US fiscal cliff, EU union, reforms etc etc.).  What is right is that all that money can’t buy you peace of mind, if markets are unconvinced (see fading Draghi put or the JPY at 78.2, stronger than before the latest Japanese QE announcement).

Midday levels slightly more relaxed, off lows, but still down, ahead of US data.
Bunds1,60% (-1), OBLs 0,60% (-3); BKOs 0,048% (-1,3) with UST at 1,74% (-4). Bunds 3bp off tightest levels, as are UST, but still better bid.
Spanish 2s at 3,03% (-1), 10s at 5,72% (+5). Spanish 2-10s 269bp (+6). Italian 2s at 2,11% (unch), 10s at 5,04% (+6). Italian 2-10s 293bp (+6). Spain holding ok after the supply. Italy in line. Auction supply a bit off at 3.89% and 5.72%.
Equities down 0.75% to a small percent.  EUR heavy on 1.296. Commodities down 0.75%-1%. Copper down 1.5%.

US data : Claims at 382k (fcst 375k after 382k, revised 385k), Continuous Claims at 3272k (fcst 3300k after 3283k, revised sharply up to 3304k). Revisions eventually give a rather flat picture. 4w average crawling up.
US Flash PMI at 51.5 (fcst unch from Aug 51.5) right on consensus. Output down to Sep 2009 levels, New Orders up, Employment slightly up. Nothing to brag about expansion-wise. Closing US data supply for the week with Philly Fed at better than expected -1.2 (fcst -4.6 after -7.1) and Leading Indicators in line at -0.1% (fcst -0.1% after +0.4%, revised +0.5%). No US data tomorrow. Not much Monday either.

Afternoon titbits: Talks on tax revenue sharing between Rajoy and Catalan leader Mas, which the latter described as “having not gone go well”. Catalonia will have to reflect deeply (…). Sounds familiar. Early elections obviously dynamite, as debates would certainly resolve around independency and /or sense of EUR-membership et al. Talking of Spain, press reports of ESM signing coming Wed.
EU-China meeting not yielding anymore than standard pep talk and the joy of cooperation from all sides.
Greek collation tensions on Troika demands.
S&P warning Finland on its AAA in case of slippage (see Monday’s comment: Revised budget and deficit outlooks now show 3.4% deficit this year (after 3.3% last year) and 2.8% next year (revised from 1%). To hell with austerity… Slippery road.)
EZ Consumer confidence at -25.9 (fcst -24 after the August 3-year low -24.6). June 2009 levels. Draghi effect, someone? No rebound.

Lame US start, opening down 0.50%, in line with futures and ambient mood, propped up a little (+0.25%) by the latest US data set.

It’s not like anvils are flying low, nor shoes dropping. No major news, but jittery here. No fun.
US equities don’t like the slide and are trying to crawl back to closing levels.
Bunds closed at 1,57% (-4), OBLs at 0,58% (-5) and BKOs 0,041% (-2) with UST at 1,75% (-3)
Spanish 2s at 3,09% (+5), 10s at 5,74% (+7). Spanish 2-10s 265bp (+2). Italian 2s at 2,13% (+2), 10s at 5,03% (+5). Italian 2-10s 290bp (+3).
Why do Spanish bonds always rally like hell AHEAD of the auctions? So often ends up in bruises: Spanish auction supply closing in the red at 3.92% and 5.74% (from 3.845%, stop-out 3.92%, respectively 5.666%, stop-out 5.70%). Bonds closed nevertheless off lows, as 10s spiked out to 5.83%.
Risk Off day closing with typical credit torsion around Austria / France. Good 5 YRS performance.

New Issues running a bit out of steam: Sampo Bank raised EUR 1bn 7 YRS at MS +37 in covered bond format. In corporates, Met Life ran a double-trancher with EUR 500m 7 YRS at MS +108 and GBP 500m 14 YRS at UKT +155, joined by Mondi Finance for EUR 500m 8 YRS at MS +185 and Spanish gas-utility Enagas with EUR 500m 5 YRS at MS +335, some 35 bp through the sovereign.
SSA EUR traffic was reduced to a EUR 500m 7 YRS FRN at 3mE +5for the German City-State of Bremen.
Had Dutch agency BNG successfully raise USD 2.25bn 5 YRS at MS +58.

Closing levels:
10 YRS Yields: Germany 1,57% (-4); Luxembourg 1,62% (-6); Swaps 1,79% (-5); Netherlands 1,86% (-2); Finland 1,87% (-3); EU 1,94% (-4), Austria 2,13% (-1); France 2,27% (+0); EIB 2,22% (-5); EFSF 2,37% (-4); Belgium 2,65% (+1); Italy 5,03% (+5); Spain 5,74% (+7).

10 YRS Spreads: Luxembourg 5bp (-2); Swaps 22bp (-1); Netherlands 29bp (+2); Finland 30bp (+1); EU 37bp (unch); Austria 56bp (+3); France 70bp (+4); EIB 65bp (-1); EFSF 80bp (unch); Belgium 108bp (+5); Italy 346bp (+9); Spain 417bp (+11).

EUR swap curve 2-5 YRS 50bp (-3,0); 5-10 YRS 86bp (+2,0) 10-30 YRS 59bp (unch).
2 YRS German BKOs closed 0,041% (-2) and 5 YRS OBLs 0,58% (-5).

Main at 125 from 121 (3,3% wider); Financials at 202 after 191 (5,8% wider). SovX unch at 171. Cross at 468 from 464.
Stoxx Futures at 2551 / -0,7% (from 2569) with S&P minis at 1450 (-0,4% from 1456, at European close).
VIX index at 14,3 after 13,8 yesterday same time.

Oil 92,3/109,0 (WTI/Brent) from 92,2/108,4 (+0,1%/+0,6%). Gold at 1763 after 1773 (-0,6%). Copper at 378 from 382 (-1,0%). CRB at EU COB 308,0 from 309,0 (-0,3%).
Definitively new week, new luck, new trend! Fourth positive session, with the Baltic Dry adding yet another 4.6%, fixing at 755 from 722. Question is what is shipped? Ore? iPhones? Xmas toys?

EUR 1,295 from 1,307

Greek bonds guesstimates: Everything still stable here with 2023s back to 20.50% from 20% with 2042s likewise out 25bp at 18.50%.

All levels COB 17:30 CET

Tomorrow and next week:
Running empty on data flow for the rest of the week, knowing that next week doesn’t offer much more either. German IFO on Monday. End of month data publication fatigue, so markets will run on sentiment.
Spanish bank audit due on Friday 28 Sep.
Closes auction supply for the week. 10 YRS Bunds newt Wed and long Italians to close the month next Fri to focus on. Italian and Spanish bills next Wed and Thu shouldn’t be market-rocking in the current environment.

EZ: Fri 27 M3 & Biz Climate + final Sentiment Data
GE: Mon IFO (last 102.3, Current 111.2, Expectations 94.2); Wed CPI; Thu unemployment
FR: Tue Biz Confidence; Wed unemployment
Italy: Tue Con Conf (last 86), Wage data; Wed Retail Sales (last +0.4% MoM); Thu Biz Conf (last 87.2)
Spain: Fri Mortgages; Mon PPI (last +2.6% YoY); Thu Housing Permits (last -32.6% YoY) & Retail Sales. Fri Bank audit.
US: Nothing on Friday. Mon Chicago & Dalles FED; Tue Case-Shiller Home PX, Cons Conf (last 60.6), Rich FED; Wed New Home Sales; Thu GDP revision, Pers Consumption, Durable Goods, Claims, Home Sales

Click link on title or below for today’s musical support:
No fun to hang around / Feeling that same old way
No fun to hang around / Freaked out for another day
Hat off to The Stooges (1969) for the original, but, hey nothing beats the SP cover…

For the purists: The Stooges eventually covering the Sex Pistols covering The Stooges

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