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 27 September 2012

27 Sep 2012 – “ The Rain Song ” (Led Zeppelin, 1973)

27 Sep 2012 –  “ The Rain Song ” (Led Zeppelin, 1973)

Rainy week, indeed. Taken lower by the European jitters, following the US sell-off on Tuesday, US equities didn’t make any recovery after the European close. A vague attempt to reach and breach prior closing failed and US indices slumped back to close halfway between prior close and lows of day, on average about a good 0.5% lower. Asian risk a mixed story this morning, having mainly traded lower throughout the session and ripping higher around 7 MA CET as a mix of relaxed IPO rules and substantial POBC injection into the money markets (ahead of next week’s week-long holiday close) lifted Chinese shares up 2.5% (having, as a reminder, ticked and closed on Jan 2009 lows yesterday).

Good for sponsoring a European 0.5% rebound in equities at open. Not a very credible game-changer, though.
Bunds open flat at 1.46%. Most EGBs about unchanged, including the Periphery short end, ahead of today’s Spanish budget and Italian auction (4.12% and 5.26% at open for the 5 and 10 YRS on-the-run). EUR curve about flat. Credit opening quotes a tick or two tighter, after yesterday’s 5-7% sell-out. Light commodities recovery (Oil +1%), but copper just up a tick (so the China story is fast petering out and not seen as that fundamental). EUR caught below 29-handle.

Chinese Industrial profits down 3.1% in Aug after -2.7% in July (nearing this year’s low print of -5.2% after Chinese New Year in Feb). German Import prices higher than expected (on energy, probably) at +1.3% MoM /+3.2% YoY (fcst +0.8%/+2.7% after +0.7%/+1.2%). Ouch! Yesterday’s French unemployment numbers bleak, as leaked, with the 3m-mark broken at 3.001k (up from 2.987k). Highest number in 13 years – and rising. German unemployment stable at 6.8% record low since Dec 2011 (+9k after revised +11k, fcst was +10k after +9k). Interesting to see that German
Spanish Retail sales surprisingly resilient at -2.1% MoM (fcst was only a slight “pick-up” to -6.1% after the prior -7.4%). Housing permits actually rising, but still down -37.1% YoY.
Italian Biz Confidence, as all Italian confidence figures lately, a little over forecast at 88.3 (fcst 87.5 after 87.3). Draghi effect? Might not hold, if the Draghi put keeps running out of steam.
Euro zone M3 development lower than expected at +2.9% (fcst +3.3% after +3.8% revised lower to +3.6%). 3m average eventually unchanged at 3.2%, after revision. Lending is contracting further with Private Sector loans falling 0.6% in Aug (after -0.4% in Jun and Jul).
Final lead shoe of the day was the Biz Climate at -1.34 (fcst unch -1.2), next to Final Confidence data, which confirmed Consumer at -25.9, but lowered Economic, Industrial and Services all by about 1 point in a final read to respectively -85,  -16.1 and  -12. Confirms low PMI reads all around.

Final auction of the month on the modest side with Italy under target with EUR 2.7bn 5 YRS at 4.09% (COB 4.12%, open 4.12%, traded 4.19% ahead of results. Previous auction 3.71% mid-Sep in off-the-run 5s) and EUR 2.9bn 10 YRS at 5.24% (COB 5.27%, traded 5.28% ahead of results. Previous auction 5.82% end of Aug), as EUR 3bn each were planned, next to EUR 1bn in 5 YRS FRN.
B/C around 1.3 pretty much limited service. Good auction price-wise, similar to yesterday’s 10 YRS Bunds.
Wires stating lower borrowing costs in 5s are misleading as, indeed, the last time this very issue was auctioned; it was at 5.33% late August, but ignoring the off-the-run auction at 3.71% on 13 Sep. Fading Draghi-put.
So, no, not a good auction. Paper right away under water…

In absence of really negative news, outside the heavier macro / sentiment data, and ahead of the Spanish budget, markets remained in the morning’s tentative rebound, ignoring as well the lukewarm Italian auction.
Bunds 1,47% (+1), OBLs 0,53% (+1), BKOs 0,039% (+0,5) with UST 1,64% (unch).
Periphery recovering, under Spain’s lead (after yesterday’s 30bp plus bashing) with Spanish 2s at 3,30% (-9), 10s at 5,93% (-10), below the 6%-mark, curve about unchanged, and Italian 2s at 2,40% (-1) and 10s at 5,22% (-5). Italian 2-10s 282bp (-4).
Equities up some 0.5% from yesterday’s -2.6% close and Credit equally better, tighter by 4-7 ticks, so roughly 3%. Oil up about $2.5 (2%), other commodities a tick better from close. EUR about stable at 1.288.

Depressing US data to start the afternoon session, starting with US Q2 GDP revised down to 1.3% QoQ (from 1.7%), on drought impact and lower spending, Personal Consumption to 1.5% from 1.7%. Durable goods for Aug and prior revision are gloomy at -13.2% (fcst -5 after +4.2% revised to 3.3%). Ex Transport tanking, too. Only positives were Claims of 359k (fcst 375k after 382k revised 385k).
Shaved 2 bp off Bunds and UST and 0.25% off equities. Limited immediate non-impact on EUR.

Some re-widening of some 5bp of Spanish bonds from their late morning levels, ahead of the repeatedly delayed budget presentation, knowing as well that Castilla La Mancha is said to become the fifth Spanish region to tap the regional bail-out fund for EUR 800m (next to Catalonia’s EUR 5bn, Andalucia for EUR 4.8bn,  Valencia EUR for 4.5bn as well as Murcia for EUR 300m).
Better be quick for the other regions, if needed, as the EUR 18bn is being drawn dry rapidly. Especially, if Spain’s 2013 budget will hark back monies from them. Yes, it is an eternal, negative, feed-backing loop… Shouldn’t keep one from budgeting nevertheless… 

US cash open lower than European-driven futures, settling in a good +0.25%, ahead of another set of disappointing data with Aug Pending Home Sales down 2.6% MoM (fcst +0.3% after revised +2.6%). Sill up 6.6% YoY (after prior 15.2%).
Drifting lower, thereafter, before bouncing off COB levels ahead of the 17 CET presentation of Spain’s budget, for a rapid 0.50%. ESM signed by the German president. Spanish 10s back below 6% for good.

Budget news: 58% spending cuts, 42% revenue increase, with pensions, scholarships and interests costs (…) on the rise. Agency to monitor Spain's compliance with deficit targets, as well regional budget targets (see above). 43 new laws to bolster economy & Labour Reforms. Agreement on use of Pension Reserve Fund as well as a decree on wage bargaining to break deadlocks, and the 20% gambling tax and the end of a mortgage tax-break, won’t go down well with the Street. Plus a Capital Gain tax.
Hmm, and in how much time can all that be passed - if at all???
Deficit targets all unchanged: 6.3% in 2012. 4.5% in 2013, 2,8% in 2014 and 1.9% in 2015. 2013 to be the last year of recession….

First markets reactions: Good enough to maintain the latest levels in equities and Spanish bonds, but no fire works here (especially because publishing into the market close) and with a bit of a slide as budget details emerge. Will need to await further details, overnight analysis and tomorrow’s reaction.

Bunds closed at 1,45% (-1), OBLs at 0,52% (+1) and BKOs 0,036% (+0,3) with UST at 1,63% (-1)
Spanish 2s at 3,30% (-9), 10s at 5,92% (-11). Spanish 2-10s 261bp (-3).
Italian 2s at 2,35% (-6), 10s at 5,17% (-10). Italian 2-10s 282bp (-4). Italy mainly tracking Spain here. Auction paper positive at close.
Equities just positive. Credit, as usual lately, exaggerating the move and closing about 3% tighter.

Some very light New Issues traffic with Deutsche Börse for EUR 600m 10 YRS at MS +73, Ford with EUR 500m 5 YRS at +195 and another smaller Nordic corporate offering with Finnish Metso raising EUR 400m 7 YRS at  MS+155.

Closing levels:
10 YRS Yields: Germany 1,45% (-1); Luxembourg 1,57% (-2); Finland 1,72% (unch); Netherlands 1,72% (-2); Swaps 1,74% (-1); EU 1,88% (-2), Austria 2,04% (unch); France 2,20% (unch); EIB 2,18% (-2); EFSF 2,37% (+1); Belgium 2,55% (unch); Italy 5,17% (-10); Spain 5,92% (-11).

10 YRS Spreads: Luxembourg 12bp (-1); Finland 27bp (+1); Netherlands 27bp (-1); Swaps 29bp (unch); EU 43bp (-1); Austria 59bp (+1); France 75bp (+1); EIB 73bp (-1); EFSF 92bp (+2); Belgium 110bp (+1); Italy 372bp (-9); Spain 447bp (-10).

EUR swap curve 2-5 YRS 48bp (+1,0); 5-10 YRS 79bp (-1,0) 10-30 YRS 56bp (-1,0).
2 YRS German BKOs closed 0,036% (+0,3) and 5 YRS OBLs 0,52% (+1).
Main at 136 from 141 (3,5% tighter); Financials at 203 after 209 (2,9% tighter). SovX at 149 unch. Cross at 568 from 581.

Stoxx Futures at 2501 / +0,2% (from 2497) with S&P minis at 1433 (+0,3% from 1429, at European close).
VIX index at 16,2 after 16,7 yesterday same time.

Oil 91,5/111,7 (WTI/Brent) from 89,3/108,6 (+2,5%/+2,8%). Gold at 1765 after 1747 (+1,0%). Copper at 371 from 371 (unch). CRB at EU COB 306,0 from 303,0 (+1,0%).
Yes, last week was just an illusion. Baltic Dry again down 8 to 744 (-1.1%). Up 12.5% from the 662 low 10 days ago.

EUR 1,284 from 1,285

Greek bonds guesstimates: Greece widening 25bp again with 2023s closing 19.75% (20% Friday) and 2042s back to 18.25% (18.25% Fri). Not sure those hard-fought measures will pass internally and with the Troika.

All levels COB 17:30 CET

Tomorrow and next week:
Hard data lacking in Europe to get things anywhere. Final PMI data on Mon and Wed. German Factory orders at the end of the week. Unemployment figures across Europe. Of course, US NFP on Friday.
ECB next Thursday won’t do much on rates. Difficult to see the input here, unless Mario was to pull yet another rabbit out of his hat, but the mandate is quite stretched by now.
Should remain rather technical, subject to Periphery rumours and jitters.

EZ: CPI fcst 2.4% after 2.6%; Mon Final Mfg PMI 46, EZ unemployment (last 11.3%); Tue EZ PPI (last 1.8% YoY); Wed Final Comp and Serv PMI 45.9 & 46, Retail Sales (last -1.7% YoY); Thu ECB (unchanged)
GE: Retails Sales fcst -0.9% YoY (after -1%). Mon Final MfG PMI 47.3; Wed Final Serv PMI 50.6; Fri Fact Orders fcst 0% after 0.5%
FR: final Q2 GDP 0.3% YoY,  Aug PPI fcst +2% YoY, Consumer Spending fcst -0.7% YoY; Mon Finam Mfg PMI 42.6; Wed Final Serv PMI 46.1
Italy: PPI fcst +2.5% after 2.4% YoY, CPI fcst 2.7% after 3.3%; Mon Final MfG PMI & Unemployment (last 10.7%); Wed Final Serv PMI
Spain: CPI fcst 2.8% after 2.7%; Mon Mfg PMI; Tue Unemployment (last 38.2k); Wed Serv PMI; Fri Indu Output (last -5.4%)
US: Pers Income and Spending (fcst +0.2% and +0.5% after +0.3% and +0.4%), Chicago Purchasing fcst 53 unch, UoM Conf final 79; Mon Final PMI ; MfG ISM fcst 50 after 49.6, PX paid fcst 55.1 after 54, Construction Spending fcst 0.5% after -0.9%; Wed ADP, Non-MfG ISM; Thu Claims, Fact Orders, FED minutes; Fri NFP
China closed for the whole of next week.

Click link on title or below for today’s musical support:
I've felt the coldness of my winter 
I never thought it would ever go
I cursed the gloom that set upon us.

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