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

Tuesday 16 October 2012

16 Oct 2012 – “ Wild Is The Wind ” (Bon Jovi, 1988)

16 Oct 2012 – “ Wild Is The Wind ” (Bon Jovi, 1988)
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Oh, yeah. For once in the last couple of days, US Risk didn’t run out of steam after the European close, but managed to close on the highs of the day, up some 0.75% on average (that is including AAPL). Asian session in similar fashion, although Japan at +1.3% an outlier with China closing just about flat, way off highs, and the rest rather in the +0.25%-0.75% range.

Still, good back drop for some cheery Risk On to call the start of the European session. US futures still green and European equities opening quotes up 1% from COB 17:30. Spain in the headlines again with S&P following-through on the sovereign rating downgrade by cutting 11 Spanish banks (BBVA BBB- neg, as the sovereign, and Santander still BBB neg). The FT running an article that finally Spain is starting to come to a conclusion of its thought process and would ask, not for immediate support, but for a back-stop line (although not immediately), as current rates are judged as being, if not comfortable per se, bearable. Hmmm… Pollo y huevo.
Car sales, a recurrent worry next to banks over the last 4 years, down 18.5% YoY in the EZ, 10.8% in Europe as a whole (Germany -10.9ΓΉ, France -17.9%, Italy -25.7%, Spain -36.8% and Greece even -48.5%). Next support monies, this way please!

Real opening quotes after cash open slightly off highs. Bunds softer by 2bp, other EGBs by 1. Italy and Spain tighter by 3 on the short end, ahead of Spain’s long bill auction in 18m, and tighter by 3-5 in 10s (after yesterday’s 20bp widening for BONOs).
Belgium still ticking tighter and tighter, as local elections have not yet transpired the usual “schism” fears (yet) and hitting historic lows at 2.32% in 10s. That is less than 20bp to France and starts to be on the expensive side with an average since Jan 2009 of some 45 and a mean of over 50. We traded over 200 less than a year ago.
Credit tighter and catching up yesterday’s lag. Equities up 0.75%. EUR flirting with the 30-handle. Oil snapped back from yesterday’s soft patch (+2% compared to the European close) with Copper, too, on the shiny side at +1.5%.

Spanish hopes eventually overdone and BONOs rapidly back to square 1 ahead of the bill auction results. The auction size beat the targeted EUR 4.5bn with EUR 4.86bn split into EUR 3.4bn 12m at 2.823% (after 2.84%) and EUR 1.4bn at 3.022% (after 3.07%). Bid to cover 2.7 and 3.0 after 2.0 and 3.6, so mixed. Some tail on the 18m with lowest bids allocated at 3.07%. Auction results without further supporting effect for Spanish bonds.
Further bill auctions out of Belgium for EUR 1.5bn 3m at -0.01% (last -0.003%) and EUR 1.6bn 12m bills at +0.072% (last +0.095%) [Total auction size slightly below the maximum target of EUR 3.2bn, because the issuer was being price sensitive, not a demand problem per se], Greece with EUR 1.25bn (+EUR 375 non-comp bids) 3m at 4.24% (last 4.31%) and finally the EFSF sold just short of EUR 2bn 6m at -0.024% (last -0.018%).
Tomorrow will see EUR 5bn in 2 YRS re-opening out of Germany (COB 0.076%. Last +0.06% in Sep after 0.00% in Aug), next to EUR 2bn in Portuguese 3, 6 and 12m bills (Latest auction were 6m at 1.70% and 18m at 2.97% on 19 Sep).
Note that Ireland has announced EUR 500m of 3m bill for Thursday and Finland one of its rare auctions with 10s and 30s on Tue 23 Oct.
New EFSF 5 YRS benchmark opening books at mid 20s area for a Nov 2017 maturity, which seems rather on the generous side (I had gather low to mid 20s for a long 5 YRS) with an outstanding curve interpolation at MS +17. With books rapidly past EUR 7bn, guidance was eventually tightened to +23-25 with pricing at MS +23 for a EUR 5.9bn benchmark (with books closing above EUR 11bn). Deal size just shy of July’s EUR 6bn 5 YRS, its biggest public deal to date.

Mid-morning data flash: Mixed ZEW sentiment data for Germany with Current Conditions at 10 failing to meet expectations of a slight decline to 11.8 after 12.6, but with Economic Sentiment at -11.5, recovering over expectations of -14.9 after -18.2. EZ sentiment at -1.4 after -3.8. EZ CPI a tick better, after French downwards revisions, with a final reading at 2.6% (1.5% Core). EZ Trade balance a little over expectations on rising exports. No real market impact.

While an utterly useless exercise at this stage, it seems that Spain will keep pushing for joint bill issuance at the EU summit later this week, as well as for Banking Union, if possible by yesterday (Spanish approach: By pooling everyone’s debt, one will end with Federalism – by default). But Angela will only take so much- and that subject is totally taboo.
In the meantime, Schaueble out to push for stronger EU budget oversight (German approach: Federalism comes before pooling debt), frontal against France & UK attitudes.

Better Risk On midday, although not roaring:
Bunds 1,49% (+2), OBLs 0,53% (+2), BKOs 0,058% (+0,8). UST 1,69% (+2)
Spanish 2s 3,16% (unch) and 10s at 5,81% (+1). Spanish 2-10s 265bp (+2).
Italian 2s 2,11% (-2) and 10s at 4,94% (-3). Italian 2-10s 283bp (-2).
Equities up a short 1% (Spain +1.5%), in line with S&P futures. Risk 3% tighter. EGB curve up to Belgium 1-2 softer. Belgium unchanged near historic lows (see above); Italy trying to tighten again and Spain slightly wider, after paring early morning gains. Commodities still better, although off highs. EUR trying to hold out above 1.30.

Risk gaining some more traction on ok Q3 earnings, but especially with German lawmaker comments confirming earlier statements that the Spanish precautionary credit line story is unfolding. Na sowas?!
Bunds spontaneously sold down 50 ticks and Bund yields out by 5bp with the reverse for Spain, 4bp tighter in the aftermath. Equities up 0.7%. Then again, conditionality is stressed. Showdown during the EU meeting?

US CPI figures for Sep stable at +0.6% MoM (fcst +0.5 after +0.6%) / +2.0% YoY (fcst +1.9% after +1.7%) with the core rate at +2% YoY (fcst +2% after +1.9%). More importantly Industrial Production rose +0.4% (fcst +0.2% after -1.2%, although revised to -1.4%) with Capacity Uitlization as foreseen at 78.3% (fcst 78.3% after 78.2%, revised lower to 78%). So the Aug 5-year drop in IP was even worse than expected initially. Finally the NAHB housing index rose to 41 (fcst 41 after 40).

Risk On ongoing with European equities up nearly 2% by mid-afternoon, Bunds +7 & Spain -7. Rotation actually against swaps and associated agency paper. Credit ripping at 4 to 5% tighter.
Healthy US open, gapping up 0.50%.
The only shadow casting is a news, although dating from noon, that Troika talks in Greece have totally broken down, with the EU and ECB reps already gone and the IMF rep leaving, too, citing “total” disagreement. Looks like the EU meeting will be a real showdown on a couple of subjects… And Merkel on the ticker to repeat (over and over and over) that shared liability (be it presented by HvR, or by the Spaniards, or by the French, or by anyone else is totally Nein! – see above). And to add up to the disappointment, the German parliamentarians who had been so understanding at the end of the morning started a serious backpedalling exercise at the end of the afternoon. ROn equities, ROff Spain.

Hmmm… Bunds getting trashed on equity buoyancy, back to 26 Sep levels, and Spailout; Spain getting a lift on the latter, but a break from Greek Troika news and German back pedalling. Spain better, but had lost 20 bp just yesterday. Equities stopping out and squeezing. Credit ripping tighter. Risk On, but not everywhere. Wild.
Bunds closed at 1,55% (+8), OBLs at 0,57% (+6) and BKOs 0,076% (+2,6) with UST at 1,72% (+5)
Spanish 2s at 3,09% (-7), 10s at 5,78% (-2). Spanish 2-10s 269bp (+6).
Italian 2s at 2,10% (-3), 10s at 4,93% (-4). Italian 2-10s 283bp (-2)
Commodities doing alright, but not stellar in the ambient risk mood. EUR up 100 pips to 1.304, but off highs.

Take-away of today: European equities once more decoupling from the EGB weight. EGBs more cautious, but hit by equities. End of week summit might become a major food fight – or not.
Will have German 2 YRS tomorrow (COB 0.076%); German government macro-outlook; EZ Construction Output (last -0.3% MoM sa in Aug). Not much concrete. US Housing starts (fcst 770k after 750k) and Building Permits (fcst 810k after revised 2k lower 801k). Nothing funky. Doubtful the second presidential debate will steer markets.

New Issue supply once more on the light side with the EFSF EUR 5.9bn Nov 2017 at MS +23 the main event. Had English Co-operative Bank issuing EUR 500m senior 3 YRS at MS +180 and German IT leaser  Grenke EUR 125m 4 YRS at 3.125% / MS +236.

Closing levels:
10 YRS Yields: Germany 1,55% (+8); Luxembourg 1,64% (+5); Netherlands 1,78% (+6); Finland 1,79% (+6); Swaps 1,82% (+6); EU 1,93% (+5), Austria 1,99% (+5); EIB 2,17% (+3); France 2,20% (+6); EFSF 2,27% (+1); Belgium 2,37% (+4); Italy 4,93% (-4); Spain 5,78% (-2).

10 YRS Spreads: Luxembourg 9bp (-3); Netherlands 23bp (-2); Finland 24bp (-2); Swaps 27bp (-2); EU 38bp (-3); Austria 44bp (-3); EIB 62bp (-5); France 65bp (-2); EFSF 72bp (-7); Belgium 82bp (-4); Italy 338bp (-12); Spain 423bp (-10).

EUR swap curve 2-5 YRS 49bp (+3,0); 5-10 YRS 83bp (+1,0) 10-30 YRS 61bp (unch).
2 YRS German BKOs closed 0,076% (+2,6) and 5 YRS OBLs 0,57% (+6).

Main at 122 from 127 (3,9% tighter); Financials at 170 after 176 (3,4% tighter). SovX at 118 (-7). Cross at 508 from 532.
Stoxx Futures at 2545 / +2,6% (from 2480) with S&P minis at 1447 (+1,4% from 1427, at European close).
VIX index at 14,7 after 16,1 yesterday same time.

Oil 91,9/114,9 (WTI/Brent) from 90,2/114,2 (+1,9%/+0,6%). Gold at 1744 after 1735 (+0,6%). Copper at 370 from 367 (+0,8%). CRB at EU COB 305,0 from 307,0 (-0,7%).

BDY unstoppable, fixing +4.3% at 981 after 941.

EUR 1,304 from 1,294

Greek guesstimate: unchanged 17.25% and 15.00% for 2023s and 2042s, tendency heavier, though.

All levels COB 17:30 CET

This Week’s Macro Data:
Doesn’t make for an exciting reading. European data mostly minor.
Chinese massive data dump on Thursday 18 Oct. US IP and housing in the widest sense.
Auction supply with attention on Spanish 3, 4 and 10 YRS BONO auction on Thursday.
Trading will remain rather technical, subject to Periphery rumours and jitters.

EZ: Wed Construction Output
GE: Fri PPI  (last +0.5% MoM)
FR: nothing
Italy: Fri Indu Orders (last -4.9 YoY), Sales (last -5.3% YoY)
Spain: Thu Q3 House Prices (last -2.5%, QoQ, -8.3% YoY)
US: Wed Housing Starts & Building Permits Thu Claims, Philly FED, Leading Ind, Fri Home Sales
China : 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:
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