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 11 October 2012

11 Oct 2012 – “ Jump ” (Van Halen, 1983)

11 Oct 2012 – “ Jump ” (Van Halen, 1983)

Well, if yesterday was boring, the after-session had plenty of thrilling material: US equities once more traded off with the S&P (-0.6%) now nearing its 50d average at 1426). The 10 YRS UST auction was a blast and one has to go “hats off” to the US primary dealers, who managed to shift Ts out to nearly 1.75% (the highest since 25 Sep) ahead of the auction and Beige Book release, just to close the auction at 1.70% with a higher than average bid to cover (3.26 after 2.85). Strong indirect bidding, too. Closing at 1.67% thereafter. The Beige Book was nowhere full of ex-ante NFP supportive data and described economic conditions as being “modest” (down from earlier “moderate”). In FED speak hence rather beurgh… Finally after the close, S&P got medieval on Spain, taking its rating down 2 notches to BBB- and slapping a negative outlook on it, to round up things, citing recession, social discontent, regional differences and, a slap in the ECOFIN’s face, “doubts over some eurozone governments' commitment to mutualizing the costs of Spain's bank recapitalization”. Wolfgang, did you HEAR that???
Whatever, rating now in line with the buddies at Moody’s (i.e. 1 notch over Junk) and anyhow, it’s no real surprise for most. A real impact would now come from any DBRS move, harking back to my comments from 14 Jun (link to original post ) that the fate of Spanish bonds’ ECB haircut levels once and for all now depends on DBRS not lowering its assessment (AL neg, since 08 Aug) as this would send Spain into the Category III bucket and seriously increase margins.

European open nevertheless rather tame, as so often lately. Had EStoxx futures trading off 0.75% in early trade, but effective opening levels around -0.50%. Of course, the EGB credit torsion is of no surprise with Bunds down 3bp (underperforming UST) to 1.46% and Spain out by 10bp across the curve at 3.32% in 2s and 5.88% in 10s. The latter bring the 6%-mark back in sight. Pivot is the unchanged Soft Core bracket. Credit sluggishly resilient, out 1-3 bp (1-1.5%). WTI down nearly 2% overnight with the EUR eventually rather steady at 1.286, having traded down to 1.282 in Asia. Italy holding comparatively ok , head of its auction with bonds out by 5-3bp.

Getting excited about Spain is seemingly so passé, although I’d be careful about the impact on Spanish debt of any hint the DBRS analyst was to wake up from his latest pleasant Riveria holiday memories.
That the ECB hair cuts depend on rating agency assessments is of course an irony when considering the efforts via LTROs and possible OMT to support the Periphery bonds. But then again, it is an administration and has rules and objectively no one can pretend that there is no credit difference between German, France or let’s say Spain or Portugal. It remains that an increase of 5% in haircuts means billions of EUR of liquidity fading (“I felt a great disturbance in Target2, as if millions of SPGBs suddenly cried out in terror and were suddenly silenced.”)

Final CPI in Europe as one of the few things to cling to with (EU harmonized) Germany confirmed at +2.1%, France surprisingly lower with a final read at +2.2% (from initial +2.4%), Spain confirmed at +3.5%.

Italian auction with EUR 3.75bn on-the-run 3 YRS 4.500% Jul 2015 sold at 2.86%, which is a HUGE premium to yesterday’s close (COB 2.98%, 2.75% at mid-Sep auction), next to EUR 2.25bn off-the-runs split into EUR 0.85bn Sep 2016 3.42% (COB 3.50%), EUR 0.7bn Aug 2018 4.06% (COB 4.11%) and EUR 0.7bn some longer Mar 2025 at 5.24% (COB 5.230%).
Puzzled by the dynamic of overpaying these bonds well beyond the moderate softening we had over the last days… Like pointed out yesterday, this IS a disciplined PD group in Italy.
Whatever, results were good for some relief with the BTP curve tightening back 2-3bp to around closing levels. Spain tagging along.
Spanish “private” placement of EUR 4.86bn of 3% Apr 2015, 3.25% Apr 2016 and 3.80% Jan 2017 (all existing bonds) ongoing. Why the hell doing a private placement on publicly traded bonds????

Had Spanish Deputy EM re-heating bond buying hopes by stating given where spreads are, the ECB readiness and the IMF view secondary buying should start soon, while repeating Spain was still deepening reflection on whether or not to ask for assistance. That seems totally delusional… but in the meantime, the pitch seems to work.
Of course, Spanish officials see the S&P conclusions as being wrong, as they viewed the IMF outlook as too harsh.

Greek unemployment now at 25.1% with Youth unemployment at 54.2%. Greek deficit numbers astoundingly “positive”, but past experience would push for some pinches of salt. Budget gap for Jan-Sep (ex Social Security and local authorities) seen at EUR 12.6bn (after over EUR 20bn same period last year). Revenues about flat at EUR 36.7bn, below Troika-approved target of EUR 38bn, though. Hence the improvement stems from drastically reduced spending (EUR 46.6 vs. EUR 53.4bn) and probably non-payment of bills.  Public Investment revenues (still +36%) under target, while expenditure reduction over target. Seems to be the primary adjustment variable. Primary deficit at EUR 2bn (compared to EUR 6bn same period last year).
Lagarde actually pitching now for time-extension (as for Portugal and Spain already), but without the IMF lending more money either. Knowing that the ECB is adamant on non-OSI, too. So eventually the Troika remains haggling out things in Athens.

Nice bounce off the 06 Sep morning levels (the day after the OMT announcement) in EStoxx, trying to re-attack the 50d average at 2473 and Fibo retracement at 2458. Some Risk feeling developing, with no particular trigger seen. Had some rather mainstream and useless pep talk by Barroso and HvR.
Mixed mid-day picture with EStoxx up 0.4% from close (after ticking down 0.75% in early future trading). Credit a tick tighter. EUR taken over the 1.29-mark on equity buoyancy. EGBs mostly firmer with Spain just a little softer, but having recovered from the overnight S&P surprise with some support from the Italian auction.
Bunds 1,47% (-2), OBLs 0,51% (-2), BKOs 0,042% (-0,3). UST at 1,69% (-5), off morning lows.
Spanish 2s 3,25% (+2), 10s 5,80% (+2). Spanish 2-10s 255bp (-1). 
Italian 2s 2,30% (-3), 10s 5,07% (-3). Italian 2-10s 277bp (unch).
Commodities about unchanged. Copper slightly firmer. WTI off lows. EUR up 100 pips from Asian lows.

Spanish Deputy PM on the tickers, in usual need to know extent and overall agreement of any support. Ok. Nothing new. Cooling off this morning imminent support pitch.
Yeah, bueno, we know the drill: Spanish bonds immediately marked down 6-8 bp, back to opening levels. After the bickering about the 10 YRS reference in Spain, the Tesoro marked its stance by announcing it would be among the lines auctioned off next week (next to 3 and 4 years).

US figures to start the afternoon with Import Prices at +2.1% MoM (fcst +0.7% unchanged), Trade Balance at USD -44.2bn (fcst -44bn after -42, revised -42.5bn) and especially Claims at 339k (fcst 370k after 367k, revised 369k) and Continuous Claims at 3273k (fcst 3275k after 3281k, revised 3288k). Claims print the lowest since mid Feb 2008 (339k). Doesn’t look like a thrilling data set after last week’s NFP, but well enough for equities to squeeze out a further 0.2% and Bunds futures ticking lower with EUR ticking up to 1.293. Hum. Ok.

Positive US cash open supportive for the Risk On attitude, boosting European equities another 0.2% or so, step by step, although the initial +0.4-0.6% American spike kind of petered out rapidly. US Treasuries off tightest lows, too, ahead this time of the 30 YRS auction. Worth a try to see if the move on the 10s can be repeated (30 YRS 2.94% at European close, 288% at US close after the 10 YRS auction, US open in around 2.92%).

Not much else bail-outee #4 Cyprus getting the lead from its future peers by refusing Troika conditions of selling state-assets right away. Why bother complying with things one can refuse right away…

Happy closing. Italy trying to tackle the 5%-mark, Spain managing to tighten in despite the S&P downgrade. EGBs by and large about flat. Equities up 1% plus, Credit tighter by 2.5-3%. Relief rally, as the market feels all shoes may have dropped. Odd outperformance to US equities, stuck at yesterday’s levels.
Safe-haven BUNDs pressured by UST, pressured by supply. Core and Soft EGBs mostly unchanged.
Bunds closed at 1,51% (+2), OBLs at 0,54% (+1) and BKOs 0,050% (+0,5) with UST at 1,71% (-3).
Spanish 2s at 3,19% (-4), 10s at 5,75% (-3). Spanish 2-10s 256bp (unch).
Italian 2s at 2,24% (-9), 10s at 5,01% (-9). Italian 2-10s 278bp (+1)
Commodities firmer overall. Oil mixed. EUR 1.293

Italian auction paper closes 3 YRS 2.86% (auction level an overbid 2.86%), 2016 3.42% (auction 3.42%), 2018 4.05% (auction 4.06%) and 2025 5.22% (auction 5.24%). Well inside yesterday’s closing levels, but barely off auction levels. Seems to have been some sponsoring hands in the 3 YRS. No losses, though.

No real take-away today: Stronger Periphery close will be the usual opportunity for politicians to rant about the lack of clout of rating agencies. Good Jump in Risk appetite. Question is how far. Lack of absence of negative news, or better, markets simply ignoring the latter, doesn’t make for a convincing bullish rebound. I’d say: We won’t get fooled again! European Bull trap.

New Issue traffic somewhat reduced to Credit Agricole senior for EUR 1.25bn 5 YRS at MS +105, Land NRW printing EUR 750m Apr 2016 at MS -6 and fellow Land Baden-Württemberg EUR 500m 8 YRS FRN at 3mE -6.
Sweetie of the day was Nestle who melted prices for EUR 500m 4 YRS to MS +5, a mere 0.75% in yield, its tightest and absolute lowest ever print. Probably one of the lowest corporate issues in EUR ever.

Closing levels:
10 YRS Yields: Germany 1,51% (+2); Luxembourg 1,59% (unch); Netherlands 1,73% (unch); Swaps 1,77% (+1); Finland 1,76% (unch); EU 1,91% (+1), Austria 1,98% (-1); EIB 2,17% (+1); France 2,19% (unch); EFSF 2,31% (-1); Belgium 2,40% (-1); Italy 5,01% (-9); Spain 5,75% (-3).

10 YRS Spreads: Luxembourg 8bp (-2); Netherlands 22bp (-2); Swaps 26bp (-1); Finland 25bp (-2); EU 40bp (-1); Austria 47bp (-3); EIB 66bp (-1); France 68bp (-2); EFSF 80bp (-3); Belgium 89bp (-3); Italy 350bp (-11); Spain 424bp (-5).

EUR swap curve 2-5 YRS 47bp (unch); 5-10 YRS 83bp (-1,0) 10-30 YRS 60bp (unch).
2 YRS German BKOs closed 0,050% (+0,5) and 5 YRS OBLs 0,54% (+1).

Main at 129 from 133 (3,0% tighter); Financials at 180 after 185 (2,7% tighter). SovX at 138 (-2). Cross at 544 (-11).
Stoxx Futures at 2482 / +1,2% (from 2453) with S&P minis at 1435 (+0,1% from 1434, at European close).
VIX index at 15,5 after 16,3 yesterday same time.

Oil 92,5/115,6 (WTI/Brent) from 93,3/115,2 (-0,8%/+0,4%). Gold at 1770 after 1763 (+0,4%). Copper at 376 from 372 (+1,1%). CRB at EU COB 307,0 from 309,0 (-0,6%).
After fixing unchanged yesterday at 875, BDY up 3.2% to 903.

EUR 1,293 from 1,290

Greek bonds guesstimates: Greek bonds frozen with 2023s at 18% and 2042s at 16.5%.

All levels COB 17:30 CET

Tomorrow and Next Week Macro Data:
Looking forward to next week doesn’t make for an exciting reading. European data mostly minor. German ZEW sentiment indicator. Chinese massive data dump on Thursday 18 Oct. US IP and housing in the widest sense.
Auction supply with attention on Spanish 18m bills next Wed and especially the 3, 4 and 10 YRS BONO auction on Thursday.
Trading will remain rather technical, subject to Periphery rumours and jitters.

EZ: Fri 12 EZ IP fcst -0.4% (last +0.5% MoM); Tue EZ CPI Final +2.7%; Wed Construction Output
GE: Tue ZEW (last Current 12.6, Sentiment -18.2); Fri PPI  (last +0.5% MoM)
FR: Pffff… Rien
Italy: Fri Final CPI 3.4%; Fri 19 Indu Orders (last -4.9 YoY), Sales (last -5.3% YoY)
Spain: Thu Q3 House Prices (last -2.5%, QoQ, -8.3% YoY)
US: Fri PPI fcst +0.8% after 1.7% PPI Ex fcst +2.5% unchanged YoY, U Michigan Confidence fcst 78 after 78.3 Mon 15 Emire Manu, Retail Sales, Biz Inventories, Tue CPI, IP, Wed Housing Starts & Building Permits Thu Claims, Philly FED, Leading Ind, Fri Home Sales
China : Sat 13 Trade (fcst Exports +5.6% after 2.7%, Imports +2.4% after -2.6% YoY); Mon CPI fcst +1.9% after +2%; Thu Q3 GDP fcst +7.4% after +7.6% YoY, +2% after +1.8% QoQ, IP fcst +9% after +8.9% YoY, Retail Sales +13.2% unch YoY.

Click link under title or below for today’s musical support:
Had to place that one somewhere sometime. Bear with me – and hop around, while doing some Air Guitar chops.And Eddie Van Halen just got voted yesterday Greatest Guitarist of All Time by Guitar World (A view I personally don't share, but so be it...)

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