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 13 November 2012

13 Nov 2012 – “ That’s The Way ” (Led Zeppelin, 1970)

13 Nov 2012 – “ That’s The Way ” (Led Zeppelin, 1970)

As Greek discussions overnight revealed a spat between Europe and the IMF, and given yet another closing slump in the US, Risk started on a weak footing with Risk nearing Friday lows, before being ramped up by rumours, showered again and finally supported by the US opening in negative, albeit tame manner, before moving into positive territory and taking everything along. Given the noon despair, the afternoon relief seems…exuberant. Especially as the US still lead the way.
"That's The Way" (Bunds 1,34% unch; Spain 5,83% -5; Stoxx 2494% +0,8%; EUR 1,272 +1)
Eventually, algos DO have some sense of humour, otherwise one couldn’t explain yet another next to unchanged US close with the S&P closing right on the 200d average… of a couple of days ago (200d 1381). Whatever. US bonds closed, equities trading at 50% of volume because of Veterans’ Day. Yet another failed attempt to bounce off that S&P 200-day mark.
Asia finally very weak overnight. China fast on its way to re-test the 2004-low print of late September, which, in turn, was the lowest since 23 Jan 2009 (then right before Chinese New Year).
No hard data, but sentiment broken by the lack of US upside and by overnight news on Greece showing that things remain tricky. Indeed, an open spat was revealed between the IMF and Europe on when to get to a 2% deficit. At the end of the day nobody really cares whether this should be 2020 or 2022, of course, as this is so far away in time that it is irrelevant – outside punching these numbers into a spreadsheet that will spit out some theoretical result that only makes sense in a non-human, non-political world. Algo, I hear you coming. Still. Spat is spat. A final decision is now due on 20 Nov and, in the meantime, we’ll just juggle some more and hope not to miss any catch...

European equities gapping down over 0.5% from yesterday’s close in early future trading and stuck there at cash open. EGBs in slight Risk Off-mode, although it gets difficult to push the Hard Core much tighter. Periphery duly wider by 3-4bp across the curve.
30 minutes later, equities went to tickle last Friday morning’s lows, extending losses to 1% with EGBs now reacting and Bunds re-testing their 1.32% low of last week and taking all others along for the ride, except of course the Periphery Twins, widening another 3bp with Italy at 5.07% in 10s (B+375), Spain at 5.94% (B+462); 2 YRS Italians at 2.22% and Spanish peers at 3.25%.
Having had that discussion a couple of weeks ago, one will note that Spain’s 10 YRS benchmark is indeed a Jan 2022 and that an interpolated 10 YRS (with the Jan 2024) would reveal a yield 10bp higher, i.e. past the 6%-mark.
Commodities off to a weak start, in line with the soft overnight sentiment, and with the EUR trading 1.267, the lowest since early Sep.

Macro data unsurprising with French Q3 Employment ticking down0.3% (after -0.2% in Q2). Final Italian CPI at 2.8% and Spain’s at 3.5% YoY (EU-harmonized).

Had Schaueble & Moscovici playing Love Fest on each other and for Greece. Still, no one knows how to deal with the Greek debt, but there will be a way. Without any OSI, though. Just need to find something. Then again, it took Odysseus 10 years to find his way back home…
It did floor the market until ZEW data for Germany and the EZ was published, showing tanking German Current Sentiment to +5.4 and Economic Sentiment to -15.7. Current had been forecasted +8.2 after 10 for Sep (and steady decline from April at 44, then 33, 21, 18 and 13) and Sentiment forecast had been -10 after -11.5 (and before that -18, -26 and -19). Steady decline from Current high since 2009 at 91.5 in May 2011. EZ ZEW expectation at -2.6 after -1.4. Through this year had been -22.3.

Dutch (tap) auction quickly done and dusted for EUR 2.1bn at 1.579% (COB 1.605%) on an up to EUR 3bn target. Not bad, near June all-time lows of 1.53%. Seems fair.
Bill supply: Italy with EUR 6.5bn 12m bills at 1.762% (after 1.941% last month, but 1.692% in Sep, having been OMT’ed from 2.77% mid Aug and a high of 3.97% in June). Greece bridged, together with its banks, part of its IMMEDIATE funding needs with EUR 1.3bn 3m at 4.20% (down from 4.24%) and that extra slice of EUR 2.76bn (targeted EUR 2.125bn) 4-week bills at 3.95%. So why the stress? Finally, Belgium issued EUR 1bn 3m at -0.004% (from +0.004% 2 weeks ago) and EUR 1.3bn 12 at +0.076% (from +0.072% one month ago).

EUR 5bn new German 2 YRS 0.000% 12 Dec 2014 (about 0.06% over the outstanding Sep 2014, COB -0.030%) tomorrow. DE0001137404.
Thursday: The Italian bond auction will be the highlight of the week with EUR 3.5bn in on-the-run 3 YRS 4.500% Jul 2015 and up to EUR 1.5bn in 4.75% Aug 2023 and 5.25% Nov 2029 bonds. France with EUR 7.5bn 2, 3 and 5 YRS BTANs and OATs. Ireland to sell EUR 500m 3m bills on Thursday.

Italian auction results soothed some raw nerves (despite Italian debt now hitting another all-time high of EUR 1,995bn so the two trillion is in sight) and had the Periphery claw back some losses with Italy just marginally wider from COB (but Spain still sluggish).
Still, a heavy market with Risk retesting opening lows around -1% and Credit out by 2.25% across the board. Readying up to test Friday’s lows.
Saved by the gong as Juncker played down the difference with the IMF on Greek targets as being “nor real dispute”. Just a false one, then.
Had likewise media rumours (BILD - of all well-informed "financial" papers)(Argh!!!)(…) stating Germany wanted to bundle aid tranches totalling EUR 44bn for Greece. Seems very much at odds with the late haggling, unless the Troika was to shove that over as the latest concession before closing its intervention in Greece and leave the country on its own.
Whatever. Good for a +0.50% in equities and a 50 pips spike in EUR/USD. Tight markets.

Mid-day levels recovering from the initial weakness and failed attempt to test Friday lows with Risk suddenly buoyed by the latest rumours. Had Core EGBs back to flat with Austria stuck at new historic lows; France and Belgium on its heels. Italy back to closing levels, but still above 5%, leaving Spain still on the drift.
Bunds 1,35% (+1), OBLs 0,37% (+1), BKOs -0,038% (+0,3). UST 1,60% (-1)
Spanish 2s 3,24% (+5), 10s at 5,93% (+5). Spanish 2-10s 269bp (unch).
Italian 2s at 2,15% (-1), 10s at 5,02% (unch). Italian 2-10s 287bp (unch).
EUR pretty much unchanged from yesterday’s closing levels, after having tested 1.266, before spiking out vertically. Commodities sideways now with just Oil still down 1%.
Waiting for the US open for follow-up movement with not much in terms of US figures to start the afternoon.

And somehow it dimmed on players that BILD might not be the reference paper to follow after all. So back to late morning levels after all. 3 hours bump. Just in time for the US cash open.
US cash opened down “only” 0.40-0.5%, helping lift Europe a little off the ground trailing every tick from the start to unchanged levels, a recovery interrupted by IBD Optimism figures at 48.6, missing a 54 unchanged estimate.
No shoe dropping? Some upside test with the S&P past the 1381-mark again and with Europe catching back right on US equities. INDU on the run with Home Depot beating estimates biasing.
Risk Off???? What Risk Off?!
Back to neutral. In full. Spain and Italy suddenly snapping 6bp tighter. Bunds and Hard Core back to square 1 with the Soft Core still holding tight.

Short squeeze in European equities in the last hour, overtaking the US.
Bunds closing flat, Hard Core EGBs still a tick tighter. Soft Core again a little better with Austria and Belgium closing on new historic lows. EUR swap curve out to 10 YRS now on historic low with 10 YRS down to 1.655%. France just above 2.055% low.
Periphery mainly wagged by equities, wagged by US equities. Still missing an own dynamic. Soft US close will mean soft European open.
Bunds closed at 1,34% (unch), OBLs at 0,37% (unch) and BKOs -0,036% (+0,5), ahead of tomorrow’s auction, with UST at 1,61% (unch)
Spanish 2s at 3,16% (-3), 10s at 5,83% (-5). Spanish 2-10s 268bp (-1).
Italian 2s at 2,10% (-6), 10s at 4,96% (-6). Italian 2-10s 286bp (-1).
EUR eventually unchanged. Commodities drifting. Can someone please show the REAL way?

Take-away: As Greek discussions overnight revealed a spat between Europe and the IMF, and given yet another closing slump in the US, Risk started on a weak footing with Risk nearing Friday lows, before being ramped up by rumours, showered again and finally supported by the US opening in negative, albeit tame manner, before moving into positive territory and taking everything along. Given the noon despair, the afternoon relief seems…exuberant. Especially as the US still lead the way.

Outlook for tomorrow: US close. FOMC minutes shouldn’t surprise. CISCO Q3 tonight. Greece. EZ Sep Industrial Production should keep tanking, fcst -2% after +0.6% MoM / -2.2% after -2.9% YoY. Outside that minor European data. Finnish and Dutch Retail Sales will probably keep showing the Hard Core getting depressed. US Retail Sales and Biz Inventories (although data might be heavily Sandy-tainted).

European equities through 50d average levels and nearing 100d: EStoxx 2516/2427 (50d/100d), DAX 7289/7011, CAC 3459/3383, MIB 15715/14934, IBEX 7861/7397.
US: 100d/200d for INDU 13124/12993, SPX 1403/1381 and NASDAQ 3017/2983, as Apple-challenged (200d 594).
EUR: 100d 1.2635 & 200d 1.2824. Fibo retracement (of May 2011 1.494 & Jul 2012 1.204 down-leg) at 1.273& 1.315. Jul 2012 to Sep rebound levels: 1.231 – 1.247 – 1.2611.274 – 1.291.

Mixed New Issues supply with non of it especially Risk Adverse, despite the defensive morning action: Bank of Ireland in Irish covered bonds (the first in 3 years) with an impressive EUR 1bn 3 YRS at MS +270 (Ireland +100), Hannover Re with EUR 500m Jun 2043 sub debt at MS +335 and Danish Jyske Bank with EUR 500m 2.5 YRS FRN at 3mE +120. Yield shopping.

Closing levels:
10 YRS Yields: Germany 1,34% (unch); Luxembourg 1,47% (-1); Netherlands 1,60% (-1); Finland 1,62% (unch); Swaps 1,66% (-1); EU 1,71% (-1), Austria 1,75% (-3); EIB 1,87% (-1); EFSF 1,99% (-2); France 2,07% (-3); Belgium 2,25% (-2); Italy 4,96% (-6); Spain 5,83% (-5).

10 YRS Spreads: Luxembourg 13bp (-1); Netherlands 26bp (-1); Finland 28bp (unch); Swaps 32bp (-1); EU 37bp (-1); Austria 41bp (-3); EIB 53bp (-1); EFSF 65bp (-2); France 73bp (-3); Belgium 91bp (-2); Italy 362bp (-6); Spain 449bp (-5).

EUR swap curve 2-5 YRS 46bp (unch); 5-10 YRS 82bp (unch) 10-30 YRS 60bp (+1,0).
2 YRS German BKOs closed -0,036% (+0,5) and 5 YRS OBLs 0,37% (unch).

Main -1 to 131 (-0,8% tighter); Financials -2 to 180 (-1,1% tighter); Cross +2 to 538 (0,4% wider).
Stoxx Futures at 2494 / +0,8% (from 2473) with S&P minis at 1385 (+0,8% from 1374, at European close).
VIX index at 16,2 after 17,7 yesterday same time.

Oil 85,8/108,4 (WTI/Brent) from 85,9/109,5 (-0,2%/-1,0%). Gold at 1730 after 1731 (-0,1%). Copper at 349 from 345 (+1,2%). CRB at EU COB 292 unchanged.
BDIY, up again, this time to 985 from 965 (+2.1%), 4-digit back in sight.

EUR 1,272 from 1,271

Greek guesstimate: Greek bonds reacting oddly again, softer in the morning, spiking at noon, closing tighter: 17.75%for 2023s and 2042s 25 down 25 bp to 15.0%. Then again, daily turnover is in single millions, no more.

All levels COB 17:30 CET

Fast-forward Macro and Events:
Looks patchy data-wise. EZ Industrial Production tomorrow to get serious, as well as US Retail Sales and Biz Inventories. Preliminary European Q3 GDP figures on Thursday. US IP on Friday.

EZ: Wed IP fcst -1.8% MoM after +0.6%; Thu 3Q GDP estimate fcst -0.2%, ECB monthly report, CPI fcst 2.5%; Fri Cars
GE: Thu Q3 GDP fcst +0.1% after +0.3% QoQ
FR: Wed CPI fcst 2.1% after 2.2%; Thu Q3 GDP fcst flat unch
Italy: Thu Q3 GDP fcst -0.5% after -0.8%
Spain: Thu Q3 GDP fcst -0.3% unch
US: Wed PPI fcst +0.2% MoM after +1.1% Ex +0.2% after 0%, Retail Sales fcst -0.1% after +1.1%, Ex +0.3% after +0.9%, Biz Inventories fcst +0.4% after +0.6%; Thu CPI, Empire MfG, Philly FED & Claims; Fri IP and Capacity Utilization.

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