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 3 October 2012

03 Oct 2012 – “ Hit Me With Your Rhythm Stick ” (Ian Dury & The Blockheads, 1978)

03 Oct 2012 –  “ Hit Me With Your Rhythm Stick ” (Ian Dury & The Blockheads, 1978)

This remains an odd environment. As Spanish PM Rajoy mentioned just after closing time yesterday that Spailout wasn’t yet there (one of the main updraft drivers yesterday and behind the Spanish tightening), things got awry in equities and the US session tainted red, without ever really managing to get its head out of the water again, until during the closing hour, when Apple set things straight. US equities broadly managed to eek out a flat close. Quiero un iPhone para salvar el Mundo! Then, given the lack of hard data, it has always been clear that these days would be headline and rumour-driven.
Other overnight news all on the heavy side with the ADB shaving Asian 2013 growth estimates from 7.3% to 6.7% (and for 2012 to 6.1 from 6.9%), Chinese non-Mfg PMI at 53.7 (after 56.3), the CIC SWF stating the obvious that it (and others) wouldn’t touch “unsafe” EZ bonds with a flagpole and (belatedly) people getting itchy at the umpteenth revised deficit outlook of Spain (latest seems to be now -7.4% after previously 6.3% after previously -5.3% previously and an initial -4.4% forecast). Add to this that computing the Spanish stress test (as did Moody’s) tends to sketch a picture that the so-called stress factors are already nearing reality and that stressing these levels for “real”, and based on capital ratios more in line with international standards would probably double the needed funds. Finally, the Troika odyssey remains afloat with now EUR 3.5bn haggled over (up from EUR 2bn) out of EUR 13.5bn. Talking of Greece, New Normal champion Bill Gross sees the US doing a Greece by 2020, if they remain hooked on budgetary speed (always a good read).

Whatever, Europe starting the day on the back foot in rather classical manner: Bunds tighter by 2, matching Treasuries, with the Periphery however just out by 1. Equities down 0.5%, retesting yesterday’s morning and after-market lows. EUR down 60 pips in similar manner, slightly below the 29-handle. Credit flattish. Nothing major in commodities, although Oil is down 1%.

Macro data mainly in form of final Service PMI numbers, which were rather a mixed bag: While the overall EZ Service and then Composite number crawled up a tick or two to 46.1 and 46.1 (Flash 46 and 45.9, after 47.2 and 46.3), hence solely reducing the pain, EZ economy driver Germany dipped under the expansion mark at 49.7 (flash 50.6 after 48.3), while France sunk squarely to 45 (flash was 46.1 after 49.2). Spain was even worse with a final number at 40.2 after 44 in Aug. Italy’s flash was raised to 44.5 after prior 44.
In any case, a further confirmation that Q3 GDP won’t look good.

Spanish EM Guindos outlining the Bad Bank with the idea that the private sector will own at least 55% of it. You bet they will, if the asset-transfer takes place at “threshold” prices (meaning above FV), which in turn will mean that the transferring banks would be extremely ungrateful, if they wouldn’t keep a stake. Assets to be sold over 15 years. Nothing new. To be finalized. Looks like Spain actually enjoys the sovereign-regions-banks negative loop with no wish to cut the Gordian knot.

EZ Aug Retail Sales (and July upwards revisions) were an unexpected “positive” surprise at +0.1% MoM/-1.3% YoY (fcst -0.1%/-1.9% after -0.2%/-1.7% revised up +0.1%/-1.4%). So, ok, the summer period still saw some buying, stabilizing on low levels. Somehow, like the PMI data sets, at best we have stopped sinking, but Europe remains well under water.
Was good for a short uptick in equities, until people came to the same conclusion, before pushing equities back to unchanged levels. Wait and See.

From the other half of the Iberian pair, we have bailed-out Portugal moving on and trying to hark back its way to market access with a liability management exercise, akin the Irish one, with an exchange of Sep 2013 into Oct 2015 bonds. This is a first since April last year, when the Portugal sought shelter.
Looks like a very decent result with EUR 3.757bn exchanged out of outstanding EUR 9.74bn (39%). Nice streamlining exercise, bringing down Portuguese 2013 redemptions down from about EUR 20bn (bonds, bills and guaranteed issuers) and adding to debt due in 2015 of currently EUR 11.4bn.
Unfortunately, exact swap terms remained undisclosed, but I reckon the whole thing was mainly a domestic affair with local banks (as for he bills sales) and at the end of the day, if there was an element of subsidy in there, who could blame the Portuguese Treasury?
In any case, this puts Portugal on track for OMT support, at some stage, existing capital markets access being one of the conditions.
3 YRS reference around 5.25% at the time of announcement, driven down just through 5% in the aftermath. Whole OT curve down about 25bp.

We have interesting auction supply tomorrow with Spain’s EUR 4bn in 2 YRS, the new 3 YRS and 5 YRS auction, as well as EUR 8bn in French OATs Oct 2018, new 10 YRS Oct 2022 and Apr 2041.
COB levels of tomorrow’s auction issues: SPGB Oct 2014 3.20%, Oct 205 3.90% and Jul 2007 4.73%. Last auction was 20 Sep with 3s sold at 3.85%, before that 06 Sep with 2s at 2.80%, 3s at 3.68% and 4s at 4.60%.
COB level OAT Oct 2022 2.30%.2022 (Spread 11bp to the outstanding Apr 2022, swap curve worth 7bp) ISIN FR0011337880. Last auction in 10s was at 2.21% (Apr 2022). COB Oct 2018 1.30% & Apr 2041 3.19% (compare again with Austria’s 2044 on Monday at 2.88%).

Mid-day sentiment again rather lukewarm to slightly depressed, although off lows and off rebound highs.
Bunds 1,45% (-1), OBLs 0,52% (-1), BKOs 0,036% (-0,5). UST 1,61% (-1).
Spanish 2s 3,08% (-3) and 10s at 5,70% (-2). Spanish 2-10s 263bp (+3).
Italian 2s 2,16% (+0) and 10s at 5,05% (-3). Italian 2-10s 289bp (-2).
Oil still down 1% with EUR still on 29.

Lunch period detrimental to the Periphery with the late  erasing all gains and giving back up to 10bp on the short end in Spain and pushing longer bonds back to closing levels or slightly wider.

US ADP report better than expected with 162k added (fcst 140k after 201k, revised lower though to 189k). Here again, good for a slight 0.25% equity rebound, back to unchanged.

US cash open starting, slightly in the red ahead of the ISM Non-mfg with the latter printing over expectations (once more for US data) at 55.1 (fcst was a light contraction to 53.4 after 55.1). New orders, activity, prices all rising. Employment sinking, though. Ok, some profits, some margin. Inflated prices. No jobs…
Not much of an immediate reaction, though. UST a wider, equities a tick tighter, before reversing both courses and treading water.

Afternoon titbits scarce. Greek ECB holding extension discussions doing rounds, but probably more a counterfire lit to fight Troika demands.

Once more decorrelation between Credit and equities, and to some extend EGBs, as we close with a small (by past standard) credit torsion in EGBs and barely a flight into bonds.
France lagging a little ahead of tomorrow’s auction with Spanish bonds, for once, as well. Auction paper 10 bp wider than in the morning, following the shift back.
Bunds closed at 1,44% (-2), OBLs at 0,51% (-3) and BKOs 0,029% (-1,3) with UST at 1,63% (+1)
Spanish 2s at 3,19% (+8), 10s at 5,79% (+7). Spanish 2-10s 260bp (unch).
Italian 2s at 2,19% (+3), 10s at 5,10% (+2). Italian 2-10s 291bp (unch). 
Quite a beating for Oil, adding over 2% losses to this morning’s 1%, on highest output figures in the US in ages, although stockpiles declined today. Equities eventually just slightly lower. EUR holding above 29.

No European data to spice up tomorrow. Mario D, the floor is all yours, after Mariano D’s bond sales.
US claims (fcst 370k after 359k, Continuous Claims fcst 3275k after 3271k) and Aug Factory Orders (fcst -5.9% after +2.8%) in the European afternoon with FED minutes released later. NFP and Unemployment on Friday, of course.

New issues brought to a halt. Nothing of interest.

Closing levels:
10 YRS Yields: Germany 1,44% (-2); Luxembourg 1,58% (-1); Netherlands 1,72% (-2); Finland 1,73% (-2); Swaps 1,75% (-1); EU 1,90% (-1), Austria 2,02% (-1); France 2,19% (unch); EIB 2,19% (-1); EFSF 2,35% (-2); Belgium 2,51% (-3); Italy 5,10% (+2); Spain 5,79% (+7).

10 YRS Spreads: Luxembourg 14bp (+1); Netherlands 28bp (unch); Finland 29bp (unch); Swaps 31bp (+1); EU 46bp (+1); Austria 58bp (+1); France 75bp (+2); EIB 75bp (+1); EFSF 91bp (unch); Belgium 107bp (-1); Italy 366bp (+4); Spain 435bp (+9).

EUR swap curve 2-5 YRS 48bp (unch); 5-10 YRS 82bp (+2,0) 10-30 YRS 59bp (-1,0).
2 YRS German BKOs closed 0,029% (-1,3) and 5 YRS OBLs 0,51% (-3).

Main at 129 from 132 (2,3% tighter); Financials at 187 after 195 (4,1% tighter). SovX at 146 (+1). Cross at 550 (-6).
Stoxx Futures at 2485 / -0,2% (from 2490) with S&P minis at 1445 (+0,4% from 1439, at European close).
VIX index at 15,2 after 16,1 yesterday same time.

Oil 88,9/108,6 (WTI/Brent) from 92,4/112,0 (-3,8%/-3,0%). Gold at 1778 after 1780 (-0,1%). Copper at 378 from 380 (-0,5%). CRB at EU COB 311,0 from 311,0 (unch).
Baltic Dry rising 20 to 798 (+2.6%). Summer rebound peak had been 1162 early July. Fall rebound had initially stalled at 774.

EUR 1,291 from 1,295

Greek bonds guesstimates: Greece 2023s unchanged 19% with 2042s much tighter, now at 17% (yield) after 17.75%. Odd… The more news pop up the Troika is haggling, the tighter it gets… Odd…

All levels COB 17:30 CET

Rest of 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.
Next week will once more be appallingly empty on hard data.

EZ: Thu ECB (unchanged); Mon 08 Sentix Inv Confidence (last -23.2); Thu 11 ECB monthly; Fri 12 EZ IP (last +0.6 MoM)
GE: Fri Fact Orders fcst 0% after 0.5%; Mon German trade (last Ex +0.4%, Imp +0.7%), IP (last +1.3% MoM), Thu Final CPI 
FR: done for the week; Mon Biz Sent (last 93); Wed IP (last +0.2% MoM); Fri CPI
Italy: done for the week; Tue Q2 Deficit; Wed IP (last -0.2%); Fri Final CPI
Spain: Fri Indu Output (last -5.4%); Tue House Transactions; Fri Final CPI
US: Wed ADP fcst 140k after 201k, Non-MfG ISM 53.4 after 53.7 ; Thu Claims fcst 370k after 359k, Aug Fact Orders fcst -5.9% after +2.8%, FED minutes; Fri NFP fcst 115k after 96k, Rate 8.2% after 8.1%
China closed for the whole week.

Click link under title or below for today’s musical support:
Hit me with your rhythm stick! Hit me, hit me!
Das ist gut! C'est fantastique! Hit me, hit me, hit me!

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