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 17 October 2012

17 Oct 2012 – “ Rocket Ride ” (Ace Frehley / KISS, 1977)

17 Oct 2012 – “ Rocket Ride ” (Ace Frehley / KISS, 1977)
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Lift Off, we had a Lift Off! Finally US stocks managed to escape gravity yesterday and kept the stance after European close, which hadn’t happen for a while. Monday’s bounce off the 50d average helped and the first round of earnings yesterday noon, coupled with the European relief rally (regardless  whether the reality of the relief was actually factual or not at that time). Healthy +1% close, although IBM and Intel results and especially outlook disappointing after-markets. INDU trying, but failing to take out the latest highs of 05 Oct, though. Need to watch 13.550-13.600 area. Same for S&P with 50d average now at 1430.
Overnight news coming from Moody’s NOT junking Spain at this stage with Baa3 re-affirmed with a negative outlook (from negative watch). Greek haggling with the Troika still very unclear, depending on who talks last. Obviously blocking points still seen in Labour law reforms, a problem seemingly belittled by the parties in place, but obviously a growing tension source within the Greek government coalition.
Asian close most positive in Japan (+1% on yet another stimulus programme), but less stellar elsewhere with China still lying low with a marginally positive close (Big Chinese data dump tonight).

Still there comes a time when the actually relief yields to the nagging question “What’s next? For real?”. Hence opening quotes that might seem less stellar than expected, at least on equities, which had already discounted quite some good news yesterday. Equities slightly higher but less than 0.50% half an hour into the cash session. EGBs still under flight out of quality pressure with the Periphery lurching better on Moody’s Spain verdict.
Bunds out +3 to 1.58%, about in line wit UST at 1.74% (+2). Spanish curve tighter by 25bp, Italy by about 10bp; both with only marginal curve movements. EUR swap curve only marginally steeper. Credit again squeezing tighter with Main down 3 (2.5%) and Financials an impressive 8 (4.7%). EUR hitting the 1.31-mark (from 1.304 at COB). Commodities about where left yesterday evening. Somehow an uneven picture. Still, Risk On. Lift Off, we had a Lift Off! But where to???
Had some light back and forth on attained levels, but by and large opening quotes confirmed, even improved in the case of Spain with 10s hitting 5.50% for the first time since Q2/2012. Spanish 2s now well though 3%. Italy around 4.80% in 10s and 2s flirting with 2%. All is good. Credit still ripping higher.

No hard data with exception of the EZ Construction Output (for August) rising 0.7% MoM (down 5.5% YoY (after revised +0.1% MoM/ -6.2% YoY from -0.3% MoM sa / -4.7% YoY). Ok, that won’t boost European economy.
Talking about car woes yesterday, it looks like Banque PSA, the financing offshoot of Peugeot Citroën is getting under pressure.

German 2 YRS auction easily absorbed with EUR 5bn issued at 0.07% (COB 0.076%), of which EUR 800m retained for market intervention. Traded softer at open and just slightly wider ahead of the auction. Up from +0.06% in Sep, 0.000% in August and, drum roll, -0.06% in July auctions. Healthy bidding size-wise with an ok 2.0 bid-to-cover. Could have been worse given thet Risk On environment…
Good timing for Portuguese bills with EUR 250m 3m at 1.37%, EUR 830m 6m at 1.84%, EUR 770m 12m at 2.10%. Latest auction were 6m at 1.70% and 18m at 2.97% on 19 Sep. Interestingly plenty of bids (BC 6 and 12m 2.5 and 2.8, 3m 8.1), but not the maximum size in allocation with 3m bills especially skimpy. Bad prices?
Yesterday’s new 5 YRS EFSF now at MS +18 (from launch at +23). Good performance. Felt it was generous with FV around +17. Then again, great books (Asia 30%, Central Banks / SWF 43%).
Well, looking forward now to Spain’s auction at these tight levels tomorrow with up to EUR 4.5bn in 4.000% Jul 2015 (COB 3.19%), 4.250% Oct 2016 (COB 3.95%) and the 10 YRS 5.85% Jan 2022 (COB 5.44%). Wouldn’t be surprised that given attained levels, the Tesoro falls back to its bad habit of overshooting the auction size, if bids are fine. Whatever the outcome, results will show a marked improvement (just to pre-empt the headlines about falling funding costs).
Will have as well up to EUR 8bn BTAN Sep 2014 (COB 0.19%), Jul 2015 (COB 0.345%), Jul 2016 (COB 0.605%) and Jul 2017 (COB 0.93%), next to EUR 500m in Irish 3m bills (last 0.70% in Sep).

Interesting late morning press conferences / interview pre-releases criss-crossing (no shouting match yet) between Hollande, Schaueble and other German government officials ahead of the next 2 days' meetings: black, white; left, right; austerity, growth; up, down; integration, support; conditions, understanding - especially as BBG spit out the news in alternating sentences. Very funny read.
For Hollande, all is good, the end (of the crisis) is nigh. Spain needs to know OMT conditions, while up to the Germans, they depend of Spain’s assessment of assistance needs. German mantra on its understanding that bank recaps won’t be possible before banking union, which is not tomorrow’s business. Let’s say 2014. Interesting view of Hollande favouring a multi-speed Europe, debt pooling anyway and that EZ interest rates should be “harmonized”, which is a fall-back to traditional French state intervention doctrines and market control phantasms, cherished since Colbert (1619-1683, so they’ve been around for a while…). Germany’s integration first, sharing later versus sharing now for later bonding. Oh, and suddenly no one expects anything to be said or done about Greece in the coming days…
That summit will be tense and will probably not yield much.

German government economic outlook update with 2012 growth ticked up to 0.8% (from 0.7%), but with 2013 cut to a mere 1% (from 1.6%) on lowered export growth outlook (+4.4% after 5%).

If that is not “All is Good!”, tell me what it could be. Mid-day print in Risk On mode: Equities up 0.7%, but by far not leading anymore. Main down 5 ticks (4%) and Financials 14 ticks (8% tighter).
Spain crawling toward a 30 bp rally (over 200 price ticks), although most achieved at morning open. Hard Core heavy, Soft Core a a tick better. Curve movement limited. Which makes me tick a bit. This not (yet) a massive flight out of safe haven. Feels more like lightening upor unwinding spreads.
Bunds 1,60% (+5), OBLs 0,60% (+3), BKOs 0,082% (+0,6). UST 1,76% (+4)
Spanish 2s 2,79% (-30) and 10s at 5,49% (-29). Spanish 2-10s 270bp (+1). 10 YRS Bund spread crashing through 400 with no break.
Italian 2s 2,04% (-6) and 10s 4,81% (-12). Italian 2-10s 277bp (-6).
Commodities unchanged, when comparing with the rest. EUR 1.312.

Too much good news seemingly discounted as strong Sep US housing figures only had only a moderate impact: Housing starts up 872k (fcst 770k after 750k, revised 758k) and Building Permits  hitting 894k (fcst 810k after slightly revised 801k). MoM surges of 15%, respectively 11.6%. All is good?
US cash open around -0.3% refreshing the upbeat spirit and weighting a little on European equities, but some recovery with IBM and INTEL surviving initial plunges (Big Blue into the Deep Blue. Yes, I know that’s an easy one).

Afternoon bits on developing Cyprus bail-out (Cail-out?), Spain confirming that it still hasn’t agreed to anything (...) and Finland pushing the Schaueble idea that ESM lite / OMT  / credit line doesn’t count as real bail-out. Whatever, the coming EU summit will be interesting, given the disparity of views. Combining all that maybe worth a Novel prize after all…

Bunds trashed again, but remaining in its longer Mar-Jul trading range (1.13%-2.07% and below the mid-Sep high of 1.73%. Chart points 1.49 – 1.60 – 1.71 – 1.85).
Spain, on the contrary, if confirming the 5.50% level, is coming below what used to be the upper band when spiking out end of 2010. Similar point would be 4.75-80% for 10 YRS Italy.
Credit spreads crushed with Financials closing 10% tighter and the Main about 5%. Cross, too, 6.5% tighter and through 500.
Bunds closed at 1,63% (+8), OBLs at 0,64% (+6) and BKOs 0,095% (+1,9) with UST at 1,78% (+6.)
Spanish 2s at 2,74% (-35), 10s at 5,44% (-34). Spanish 2-10s 270bp (+1).
Italian 2s at 1,98% (-12), 10s at 4,76% (-17). Italian 2-10s 278bp (-5).
Commodities by and large unchanged, if not weaker (WTI -1.5%). EUR holding above 1.31, but not breaking out.

Take-away of today: European Risk remains buoyant (unlike in the US), but the question is whether Moody’s upholding Spain a tick above Junk is really worth a 30bp plus relief rally? At this stage, most SPGB owners are fully aware of the rating issue. For me the question remains rather about DBRS’ views on Spain. Any downgrade here would make LTRO stocks much heavier. But, so be it.
Post close comments that less than EUR 100bn will be used for Spain's banking bail-out. Hence, solely the EUR 60bn or so audit results?
Tomorrow, we will have a Spanish auction at the lowest levels since early April this year. Yummyyy! Chinese data dump with  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. US claims fcst 365k (after 339k, Continuous claims at 3275k after 3273k, Philly Fed fcst +1 after -1.9 (all these FED data sets tend to be disappointing these days) and Leading Indicators expected at +0.2% after -0.1%.

Mixed bag of New Issues with BNPP in senior for EUR 1bn 10 YRS at MS +105, Spanish concession Abertis for EUR 750 7 YRS at 4.825%, Deutsche Telecom for EUR 650m 12 YRS at MS +82, Lagardère for EUR 500m 5 YRS at MS +325, UniCredit for a EUR 250m increase of an outstanding Jan 2018 mortgage-backed OBG (Italian-law covered bond) at MS +190 and finally the German Land of NRW for a EUR 250 increase of a Apr 2016 issue at MS -6.

Closing levels:
10 YRS Yields: Germany 1,63% (+8); Luxembourg 1,71% (+7); Netherlands 1,85% (+7); Finland 1,87% (+8); Swaps 1,88% (+6); EU 1,97% (+4), Austria 2,04% (+5); EIB 2,19% (+2); France 2,25% (+5); EFSF 2,28% (+1); Belgium 2,41% (+4); Italy 4,76% (-17); Spain 5,44% (-34).

10 YRS Spreads: Luxembourg 8bp (-1); Netherlands 22bp (-1); Finland 24bp (unch); Swaps 25bp (-2); EU 34bp (-4); Austria 41bp (-3); EIB 56bp (-6); France 62bp (-3); EFSF 65bp (-7); Belgium 78bp (-4); Italy 313bp (-25); Spain 381bp (-42).

EUR swap curve 2-5 YRS 52bp (+3,0); 5-10 YRS 84bp (+1,0) 10-30 YRS 62bp (+1,0).
2 YRS German BKOs closed 0,095% (+1,9) and 5 YRS OBLs 0,64% (+6).

Main at 116 from 122 (4,9% tighter); Financials at 153 after 170 (10,0% tighter!!!). SovX at 106 (-12). Cross at 475 from 508.
Stoxx Futures at 2566 / +0,8% (from 2545) with S&P minis at 1455 (+0,6% from 1447, at European close).
VIX index at 15,1 after 14,7 yesterday same time.

Oil 91,8/113,1 (WTI/Brent) from 91,9/114,9 (-0,1%/-1,6%). Gold at 1751 after 1744 (+0,4%). Copper at 374 from 370 (+1,1%). CRB at EU COB 306,0 from 305,0 (+0,3%).
BDY unstoppable, fixing up +1.8% to a jolly 999 after 981.

EUR 1,312 from 1,304

Greek guesstimate: unchanged 17.25% and 15.00% for 2023s and 2042s, tendency heavier, though. Didn’t take part in the rally today.

All levels COB 17:30 CET

This Week’s Macro Data:
Doesn’t make for an exciting reading. European data mostly minor.
Trading will remain rather technical, subject to Periphery rumours and jitters.

GE: Fri PPI  (last +0.5% MoM)
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: Thu Claims, Philly FED, Leading Ind, Fri Home Sales //  US Q3 Fri 26 Oct
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:
Cohete Viajar. Enjoy the trip!
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