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

Monday 1 October 2012

01 Oct 2012 – “ Here Comes The Sun ” (The Beatles, 1969)

01 Oct 2012 –  “ Here Comes The Sun ” (The Beatles, 1969)

Whoops! Wobbly start in Europe. US closed soft, what was opened in Asia (Chinese holidays) ended rather soft, although Tokyo had a 0.50% recovery in the second session half. Initial pre-open /post-open future trading in ROff mode with equities down 0.4% from Friday evening, first Periphery quotes a tick wider and EGBs unchanged to a tick-softer. Still, 30 minutes into the new day / week / month /quarter, things turned around with no apparent trigger seen (outside more buyers than sellers) than maybe some bottom fishing after last week’s 4% plus slide, of which half on Friday.
Verdict on Spain’s budget and Spanish bank recap numbers in line with massaged expectations, but sprinkled with a heavy dose of scepticism, as to some extend the French budget (tough on tax payers): Numbers fit, given the assumptions. Question is whether these assumptions hold the line (especially on growth / tax income, given austerity shocks). Spanish 2013 borrowing up EUR 15bn to 207bn, with debt/GDP past the 90%-mark. Average maturity to fall 6m to 5.8 YRS by the end of next year, showing a funding strategy biased to ever more short-term debt (raising the OMT/bailout question, once more)(as well as the possible conundrum raised 2 months ago at the ECB press conference whether the OMT wouldn’t lead to shorten the debt, hence procrastinating a short while until hitting a wall of redemption).
On France, expect some major increase in corporate bond offerings ‘til the end of the year, given an expected tweak to 2013 interest deductibility.
Chinese weekend PMI numbers still sluggish at 49.8 (after 49.2) with that slight rebound missing the 50.1 (just about expanding) forecasts. Japanese Tankan numbers somehow beating estimates, but still in the doldrums, knowing that late Asian tensions seem to keep simmering. Weekend news that Greece would get paid the next aid tranche, procrastinating further decisions on the reality and realism of negotiated Troika targets.

Bunds 1.47% (+3) & UST 1.64% (+3); Spain -4 with 2s at 3.32% and 10s at 5.87%; others EGBs caught in-between. Equities rebounding some 0.75%; Credit 1-2% tighter. EUR about unchanged in the high 28s (having traded down to the 28-handle in Asia). Commodities flat on helicopter view.

Final Manufacturing PMI numbers mainly in line with the Flash forecasts, although hiked up a tick in general with Italy actually a positive outlier: EZ 46.1 (+0.1), Germany 47.4 (+0.1), France 42.7 (+0.1), Italy 45.7 (from 43.6 Flash). Seems like a silver lining, but doesn’t hide the fact that these figures are generally lows last seen in Q2/2009 when exiting post-Lehman stress and are low in absolute terms. Q3/2012 in the EZ will be negative. German Machinery orders down 11% YoY. Hard fact.
EZ unemployment confirmed at new record high of 11.4% (as expected), but with the July revised up to the same level. Ag Italian unemployment stable at 10.7 for the third month in a row. No worsening, although no improvement.

Supply restricted to Dutch and French bills. France with about EUR 7bn, rather at the lower end, with 3m at -0.017% (after -0.016%), 6m at -0.009% (after -0.006%) and 12m at 0.025% (after 0.006%). A likewise light Dutch offering with EUR 1.3bn 3m at -0.047% (after -0.073%) and EUR 1.2bn 9m at -0.013%.
Will have probably uneventful EFSF and Belgian bills tomorrow, next to EUR 1.5bn Austrian 2019 and 2044 bonds. Nothing on Wednesday. Spain’s EUR 4bn 2, 3 and 5 YRS auction on Thursday will be more interesting, as well as France ne 10 YRS Oct 2022.

Good mid-morning surge in Risk sentiment with equities up over 1.5% and the EUR hitting 1.29, in sync. Credit in line on opening levels. Some ROn torsion in EGBs with Bunds on stand-still, but with the Periphery tightening a little more, in parallel shift.

Mid-day levels stabilizing around these levels.
Bunds 1,47% (+3), OBLs at 0,54% (+3), BKOs 0,041% (+2,1) & UST 1,63% +(2)
Spanish 2s at 3,26% (-10), 10s at 5,85% (-6). Spanish 2-10s 259bp (+4).
Italian 2s at 2,29% (-4), 10s at 5,14% (-2). Italian 2-10s 284bp (+1).
Equities up a healthy 1%, but highs with Credit matching, tighter by 1-2 ticks (1%). EUR on the 1.29 high. Commodities flattish to slightly lower.

Afternoon still in Risk On mood, triggered by stops, bargain hunting, follow thy neighbour leads. No specifically interesting nor fresh news. Everyone is happy to assist Spain, if needed, as the latter is still in analysis mode. No news.
US cash open unhindered by the downward correction in US PMI to 51.1 (flash was 51.5), opening up half a percentage point, but feeling a little heavy, and capping European euphoria.
Sep Manufacturing ISM at 51.5 (fcst 49.7 after 49.6) and Prices paid at 58 (fcst 55.7 after 54) were good news for Risk. Construction spending for Aug was less exciting at -0.6% (fcst +0.5% after-0.9%).
Good for additional 0.50% in equities with the US up 1% and Europe even 1.8% with France especially strong (Surprising, given the punishing budget…).

Greece draft budget: 2012 primary deficit 1.4% of GDP (EUR 2.8bn), 2013 surplus of 1.1% of GDP; 2012 debt/GDP 169.5, next year 179.3%. And contrary to the weekend news, the Troika still seems adamant to haggle out EUR 2bn (out of EUR 13.5bn), down from EUR 6bn, knowing that other rumours were stating that the shortfall was EUR 20bn anyway. Side battles in a grander question?

Getting caught in end of day divergence between recovering Bunds / UST and equities readying up a pre-close squeeze out. Then again, we pretty much had the contrary picture on Friday, as equities settled for a final dump, while EGBs had closed bay and large sideways. Note a rather muted, in line, Credit performance.
Bunds closed at 1,46% (+2), OBLs at 0,54% (+3) and BKOs 0,052% (+3,1) with UST at 1,63% (+2)
Spanish 2s at 3,25% (-11), 10s at 5,84% (-7). Spanish 2-10s 260bp (+5).
Italian 2s at 2,25% (-8), 10s at 5,13% (-3). Italian 2-10s 288bp (+5).
EUR holding above 1.29. Commodities slightly better. Nothing major, although Gold paid in EUR has hit new intraday highs at 1382/oz.

No real data anywhere tomorrow, so either the good spirits of recovery keep up their heads up – or not…

New issues rather on the low key side with smaller offerings (EUTELSAT EUR 300m 8 YRS at MS +137, Unicredit EUR 350m Sep 2015 tap at MS +350) or close-to-home / safe haven deals like EAA EUR 500m 4 YRS tap at MS +26 or Rabo EUR 2.5bn 1-year FRN at 3mE +12. The Czech Republic increased its outstanding 10 YRS May 2022 by EUR 750m at MS +116.

Closing levels:
10 YRS Yields: Germany 1,46% (+2); Luxembourg 1,59% (+3); Netherlands 1,73% (+2); Finland 1,74% (+2); Swaps 1,77% (+4); EU 1,91% (+3), Austria 2,03% (+1); France 2,19% (+2); EIB 2,20% (+2); EFSF 2,36% (-1); Belgium 2,54% (+1); Italy 5,13% (-3); Spain 5,84% (-7).

10 YRS Spreads: Luxembourg 13bp (+1); Netherlands 27bp (unch); Finland 28bp (unch); Swaps 31bp (+2); EU 45bp (+1); Austria 57bp (-1); France 73bp (unch); EIB 74bp (unch); EFSF 90bp (-3); Belgium 108bp (-1); Italy 367bp (-5); Spain 438bp (-9).

EUR swap curve 2-5 YRS 48bp (unch); 5-10 YRS 80bp (unch) 10-30 YRS 59bp (+1,0).
2 YRS German BKOs closed 0,052% (+3,1) and 5 YRS OBLs 0,54% (+3).

Main at 133 from 136 (2,2% tighter); Financials at 200 after 204 (2,0% tighter). SovX at 145 (-3). Cross at 558 (-10).
Stoxx Futures at 2496 / +1,8% (from 2452) with S&P minis at 1449 (+1,3% from 1431, at European close).
VIX index at 15,6 unchanged from Friday same time.

Oil 92,7/112,3 (WTI/Brent) from 91,8/111,9 (+1,0%/+0,3%). Gold at 1778 after 1773 (+0,3%). Copper at 378 from 376 (+0,5%). CRB at EU COB 309,0 from 308,0 (+0,3%).
Baltic Dry rebounding another 11 points (1.4%) to fly a 777. Seems like Iron Ore is back in favour.

EUR 1,291 from 1,285

Greek bonds guesstimates: Greece getting really strong with 2023s closing 19% (-25) and 2042s probably through down to 17.75% (-25). Troika haggling – or not. Seems that the market feels that the Greeks will be left off the hook, should push come to shove.

All levels COB 17:30 CET

This week:
Hard data lacking in Europe to get things anywhere. Further Final PMI data on Wed. German Factory orders at the end of the week. Unemployment figures across Europe. Of course, US NFP on Friday.
ECB on 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. Spanish auction on Thu, as well as a new French 10 YRS.

EZ: Tue EZ PPI fcst 2.6% (last 1.8% YoY); Wed Final Comp and Serv PMI 45.9 & 46, Retail Sales (last -1.7% YoY); Thu ECB (unchanged)
GE: Wed Final Serv PMI 50.6; Fri Fact Orders fcst 0% after 0.5%
FR: Wed Final Serv PMI 46.1
Italy: Wed Final Serv PMI
Spain: Tue Unemployment (last 38.2k); Wed Serv PMI; Fri Indu Output (last -5.4%)
US: Tue ISM NY (last 51.4); 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:
Promise held…

And the lost guitar solo

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