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

Saturday 1 December 2012

Shuffle Rewind 26-30 Nov " Somewhere Over The Rainbow " ("IZ" Kamakawiwoʻole, 1993)

Shuffle Rewind 26-30 Nov " Somewhere Over The Rainbow " ("IZ" Kamakawiwoʻole, 1993)

This week in review (compared to Fri 23 Nov COB):
Click on day for related post, on title for song.

After a week of Awakening to Risk, mainly the Fiscal Cliff, and then a week lacking Direction, the week ending 23 Nov was a strong case for “The Only Way is Up!” with Risk assets just soaring, ending a 3-week cleansing process with weak longs as well as weak shorts stopped out and volatility crushed back."The Only Way Is Up" (Bunds 1,44% +12; Spain 5,60% -26; Stoxx 2552 +4,8%; EUR 1,296 +260)
That strong Risk On week closed on Friday 23 Nov with markets opening unchanged and staying put, despite better German IFO numbers. Still, that was followed with yet another light ROn close. Worries were put aside on Greece (and on the Fiscal Cliff), As sentiment figures were all for the better. And some Thanksgiving turkeys made it through the day and went to "Fly Like An Eagle" (Bunds 1,44% +1; Spain 5,6% -4; Stoxx 2552 +0,7%; EUR 1,296 +80). US markets kept the drive and added a quarter point higher than European COB at +1.3% on the day. UST unchanged at 1.69%.

One was hard pressed to find anything remotely exciting on Monday. Equities were losing a little shine, which was understandable given the prior week’s 5% rush (and 14% tightening in Credit). Bonds remained stuck in range. The Fiscal Cliff started hailing back (in yet rather timid manner, though) and players were waiting for the final sign-off the latest Greek rescue package. Yawn! "Sailing" (Bunds 1,41% -3; Spain 5,6% unch; Stoxx 2542 -0,4%; EUR 1,296 unch). Tuesday morning saw that Greek thing solved (at least for the next months), but after an initial ROn reaction, markets got stuck. Ok. It’s not that the Greek deal was nothing. But then again, third strike. Eventually expected, or at least hoped for. Hence, lack of concrete follow-through. So, now it simply was there. And then what? What was there to see??? Markets in need of some input, something concrete, something to feed off, something to see! "You Ain't Seen Nothin' Yet" (Bunds 1,43% +2; Spain 5,51% -9; Stoxx 2538 -0,2%; EUR 1,293 -30). Once more, Wednesday was a day with not much stuff to chew on Europe’s own. Had some drifting. EGBs were very strong on (relative) (initial) equity weakness. Periphery bonds started to glow like the ZZ Top Eliminator. In absence of any strong lead, one felt the urge to start thanking everyone for input and support (Mario, Ben, Angie, Chrissie… Anyone working on the Fiscal Cliff. Mariano & Mario. Wolfie...), putting a new paradigm into practice: Nothing will ever be weak again, nothing. And watch out for FC Ping-Pong! And I Thank You! "I Thank You" (Bunds 1,37% -6; Spain 5,31% -20; Stoxx 2547 +0,4%; EUR 1,293 0). Had once more US lawmakers timing supportive FC pep talk around the lows of the US market. Thursday simply put Wednesday into practice: Thanking everyone turning around markets, when they sink (Good timing on Wed). Nothing to break the barn stomp in Periphery bonds (but themselves), so people might as well side-step going short into strength. Italy brilliantly stuffed its primary dealer at a 2-year low, but then, they hadn’t to bid that aggressively. Core EGBs holding quite steady, given ROn in Risk and Periphery. Strong, but expected US GDP revision, meeting some yawns. Given the actual level in Risk, good numbers are seen as given. Nothing weak, no more, never. Swimming in a Sea of (Risk) Love. Hard Periphery (especially Spain) slap-back in the afternoon, though. "Sea Of Love" (Bunds 1,37% unch; Spain 5,32% +1; Stoxx 2579 +1,3%; EUR 1,298 +50). Still a fickle market, especially every time the Fiscal Cliff Discussion Event Risk (FCDER) pops up. And FCDER there was with a rocky US session, once Europe had headed home. Europe felt again rather direction-less on its own on Friday morning (and later, as well). Equities still rather firmer than not; with Bonds just the same. Macro data generally rather bleak, although expectations have been put so low lately that anything about palatable will do. Peeking over the Pond to see whether Fiscal Cliff discussions could scuttle things. Here late valuations are such that numbers should be really good to get things going. So ending the week: Drifting. Chatting. Checking. "What's Up?" (Bunds 1,38% +1; Spain 5,3% -2; Stoxx 2580 unch; EUR 1,301 +30). And guess what? After yet another round of FCDRE, the US market closed just flat… Peace & Love.

Hey, this was cuddle time-week! A big Hug for everyone: Bonds, Equities, Periphery, ah, Periphery bonds! Greece…
As Super Mario said himself on Friday, albeit in a different context: “We were living in a Fairy World”. Cute way of spelling it out.
Fairies, rainbows, wonderful world…  Let’s put IZ on the case!
"Somewhere Over The Rainbow" (Bunds 1,38% -6; Spain 5,30% -30; Stoxx 2580 +1,1%; EUR 1,301 +50)

Having been slapped left and right last week, EGBs were back in shape after that poor previous week that had seen Bunds widen by 12bp to 1.44%, which by and large remained historically rather tight. Still not sure whether the trigger was solely the general Risk On sentiment or the realisation that somehow the EZ was sticking together – and that some spirit of debt mutualisation was eventually underlying this. Caught together, hung together. Probably both. Overdone maybe, and in line with Treasuries, the Hard Core crawled back, although the Compression movement this week remained impressive and the action was rather in Soft Core and obviously in the Periphery.
While Monday wasn’t the most exciting day, Bunds regained some 3bp, which right away got lost on some Hard-Soft compression the next day. Wednesday was a good one (-6), while Thursday was even. With Friday at unchanged to +1, Bunds regained 6 basis points on the week, closing at 1.38%, recouping slightly more than half of last week’s losses. 10 YRS Bunds remain on the lower end of their range (1.13% - 2.07% between retracements at 1.35%, where they remained stuck for a week a fortnight ago, and then 1.49% and 1.60% on the upside).
As mentioned, the action was in the Soft Core: Austria now 36 to Bunds (from 40), France and Belgium closing at about historic absolute lows of 2.04% and 2.16% with Bund spreads back down to 66 (from 72) and 78 (from 85). Belgium probably unduly tight to France at +12. Interesting to see that swaps remained about unchanged to Bunds and that Agency / Supra paper still seems rather stuck to swaps, hence underperforming a little in the compression movement.

The Periphery had once more a serious Bull Run, more than simple love, especially Spain, tighter by 30bp on the week (unch, -9, -20, +1 & -2) and Italy, just behind, -26bp on the week (unch, -3, -13, -3 &  -3). So after last week’s 12bp tightening for BTPs and 26bp for BONOs, we are closing below symbolic 4.5% for the first and nearing the low of the former stress highs around 5.25-5.50% for the second. And all that still without OMT put into practice. OMT? What’s that? All but forgotten? Split performance of the short end (except for Friday) with short Italians at 1.80% (from 1.82%) and Spain at 2.83% (from 2.96%). Quite a curve flattener in Italy, especially on Friday, with 2-10s closing at 247 (from 292); Spain at 269 (from 266). Not much of news out of Spain to fundamentally change things, but no stress either.
Good (too good?) Italian 5 and 10 YRS auction on Thursday – price-wise. However, the did to cover was reaaaaally modest at 1.2. But then, as in late auctions, great prices, but 25bp tighter in 24 hours… Who reaaaaally wants to buy that stuff for real? Honestly?
10s back to mid-Dec 2010 levels. 5 YRS through the March 2012 lows and hitting, too, Dec 2010 levels. We had hit 2.60-lows in Oct 2010 before rapidly drifting to the 3.75%-4.00% area within 2 months. Likewise in Italian bills: EUR 7.5bn 6m bills sold at 0.92% (from1.35% late Oct). This was the first time Italian 6m bills were sold below 1% since Aug 2010.
Not quite there yet for Spain… Slightly over the targeted EUR 4bn were sold in Spanish 3 & 6m bills at 1.25% and 1.67% (last 1.42% and 2.02% one month ago). Ok, we’re still miles away from the pre-crisis and pre-pre-crisis lows (2012 low in 6m was 0.76% in Feb and were in the 0.50% mid 2010), but now more than halved from the highs.Still, a very good week in the Periphery.

Not much to say on Greece, except that new price highs have been hit on the very long end. Closing at 16.00% (-25 bp) for 2023s and 12.50% (-100).
Need to see how that buy-back story pans out for real. So give us those buy-back prices now! NOW!

EUR swaps closing on historic lows on Friday evening. 2-10s tightening to 126 on long-end strength (from 131 last week and 127 prior) with 2-5s at 45 (from 48) and 5-10s at 81 (from 83). 10-30s widening, though, to 63 (from 61). Still think that 30s should perform in case of confirmed ROn with reduced inflation-fear.

After last week’s wild action in Credit (13-14% tightening), as for equities, things got calmer and markets mainly drifter sideways, closing barely changed. Crossover still just below 500.

Having ripped 5.1% higher last week, European equities fared rather well this week again, closing up 1.1%, albeit in tamer manner. Bit of a correction Monday (-0.4%) and Tuesday (-0.2%), recovery on Wednesday (+0.4%) and a 1.3% push up on Thursday before closing unchanged on Friday in low volatility. Biggest worry are Fiscal Cliff discussions popping up. In absence of negative news, shorts would rather hit the button once year-highs fully attained, next to some bad news. But everything seems so nice out there these days…
Volatility drifting in a low basis of just above 15.

European 50 & 100d averages: EStoxx 2509/2460, DAX 7271/7106, CAC 3447/3419, MIB 15552/15118, IBEX 7827/7509.
US 50, 100 & 200d averages: INDU 13209/13135/12995, S&P 1422/1409/1384, NASDAQ 3027/3018/2987 with AAPL at 616/625/600.

Having been a ripping ROn indicator last week (+260), things got quieter around the EUR. Difficult to get past the symbolic 1.30-mark, but doing juuust so on COB Friday (1.301). Still, up 50 pips for the week…
Next stop 1.315-1.317 area.
EUR: 50d 1.291, 100d 1.270 & 200d 1.279. Fibo retracement (of May 2011 1.494 & Jul 2012 1.204 down-leg) at 1.273& 1.315, then 1.349 (50%).Jul 2012 to Sep rebound levels: 1.231 – 1.247 – 1.261 – 1.274 – 1.291 -1.317 .

Commodities enjoyed a mixed fate. CRB up a meaningless tick overall. Oil is drifting sideways on the week. Gold had its moments of feeling suddenly unloved and trashed, unable to break over $1750 and down 2.1% on the week with a weak Friday afternoon. Copper fared better, up 2.6% on the week. China might eventually help. Or growth pop up somewhere…

New Issues were a blast with 30 deals, totalling nearly EUR 27.7bn (of which EUR 7bn for the EFSF in a 1-year deal, because of open rating issues after France’s downgrade). EFSF Moody’s rating settled Friday night at Aa1, btw. Wide choice of issuers with half of the deals from Corporates for over EUR 9bn (BASF EUR 1bn 10 YRS, SabMiller EUR 1bn Jan 2020s, IPIC 2-trancher EUR 800m May 2018 & EUR 850m May 2023), among also some Italian issuers (Lottomatica, Finmeccanica, FIAT). “Non-Core” Covered Bonds with BBVA EUR 2bn 5 YRS at MS +260 (through Spain) and AIB with EUR 500m 3 YRS. Some 2 YRS FRN senior financials with a chunky BPCE for EUR 1.75bn and fellow French CM Arkea for EUR 750m. On the SSA-side, next to the EFSF, Spanish FADE hit the market after over one year with EUR 1.75bn 3 YRS and ICO increased a short 5 YRS issue for EUR 500m at the end of the week. German Land NRW with EUR 1.5bn 5 YRS on the other end of the credit range. So stuff for anybody.

Outlook: Fiscal Cliff Discussion Risk Event still live. Greek maths on buy-back. Spain maths on its budget. Italian maths… Bah… Seem to be drifting. Bond strength with the latest levels in equities somehow puzzling. Growth slow-down versus H2/2013 Outlook. Risk levels probably too low. Not much on the fundamental side in the next 2 days. Waiting for an ECB-gesture (which shouldn’t come). Cyprus-bailout for 03 Dec.

EGBs, and now all of them, very strong alongside very tight Risk. Seems a little odd and decorellated. Compression movement still ongoing with the Soft Core and the Periphery tightening in on Germany.

On the week (compared to Fri 23 Nov COB):
10 YRS Yields: Germany 1,38% (-6); Luxembourg 1,49% (-6); Netherlands 1,61% (-8); Finland 1,62% (-7); Swaps 1,67% (-7); EU 1,70% (-8); Austria 1,74% (-10); EIB 1,86% (-8); EFSF 1,99% (-8); France 2,04% (-12); Belgium 2,16% (-13); Italy 4,49% (-26); Spain 5,30% (-30).

10 YRS Spreads: Luxembourg 11bp (unch); Netherlands 23bp (-2); Finland 24bp (-1); Swaps 29bp (-1); EU 32bp (-2); Austria 36bp (-4); EIB 48bp (-2); EFSF 61bp (-2); France 66bp (-6); Belgium 78bp (-7); Italy 311bp (-20); Spain 392bp (-24).

EUR swap curve 2-5 YRS 45bp (-3,0); 5-10 YRS 81bp (-2,0) 10-30 YRS 63bp (+2,0).
2 YRS German BKOs closed 0,007% (+1) and 5 YRS OBLs 0,40% (-3), on the week.
UST at 1,61% (-8). Swiss 2-YRS closing about unchanged at -0.230% at -0.225%.

Main at 123 from 121 (1,7% wider); Financials at 160 after 161 (-0,6% tighter); Cross at 497 from 496 (0,2% wider).
Stoxx Futures at 2580 / +1,1% from 2552 with S&P minis at 1412 / +0,7% from 1402, at European COB last week.
VIX index at 15,8 after 15,1 last week.

Oil 88,5/110,9 (WTI/Brent) from 88,2/111,0 (+0,4%/0,0%). Gold at 1712 after 1748 (-2,1%). Copper at 361 from 352 (+2,6%) . CRB closed +1 tick at 299,0 (+0,3%).
After rising continuously for nearly 3 weeks, hitting 1104 on Wednesday, the BDIY gave back some gains over the last 2 days, closing at 1086 (down from 1090 last Friday).
Intermediate 2012 high (post-Chinese New Year) was at 1165 early May after a 10-year low at 647 early Feb, before dipping to 872 in June, rising back to 1162, retesting lows at 661 mid-Sep, re-testing highs at 1109 before sliding back to 916 in the last down-leg

EUR 1,301 after 1,296 last Friday

Greek guesstimate: Greek bonds closing the week at their tightest levels of 16.00% (-25 bp) for 2023s and 12.50% (-100).
Need to see how that buy-back story pans out. So give us those buy-back prices now!

All levels Friday COB 17:30 CET

Fast-forward Macro and Events:
Hmm… Bits and pieces on the macro front. Industrial output in Spain on Wed. Factory Orders in Germany on Thu. Fri NFP in the US.
Thursday ECB& BOE (FED on 12 Dec)

The start of next week will be flushed with bills (Belgium, EFSF, France, Germany, Netherlands) and see additional EUR 4bn German 2 YRS on Wednesday. Spain will hold an auction in 3, 7 and (short) 10 YRS on Wednesday as well (as Thursday will be closed), while France will supply its monthly OAT auction on Thursday, albeit for only up to EUR 4bn and without 10 YRS (2018, 2019 & 2027).

EC: Mon Final MfG PMI; Tue PPI fcst +2.5% after +2.7% YoY; Wed Final Comp PMI, Retail Sales; Thu EZ GDP and ECB
GE: Mon Final MfG PMI; Wed Final Serv PMI; Thu Factory Orders last -3.3 MoM, Friday Industrial Production last -1.8% MoM/-1.2% YoY
FR: Monday Final MfG PMI; Wed Final Serv PMI; Thu Q3 unemployment
Italy: Mon Budget Balance, Car Sales; Wed Final Serv PMI
Spain: Tue Unemployment; Wed Industrial Output (last 7% wda).
US: Mon Final PMI, MfG ISM & Construction Spending; Tue ISM NY; Wed Factory Orders, Productivity and Labour Costs; Thu Claims; Fri NFP

Click link under title or below for today’s musical support:
With everything so cosy out there: Let’s all have a big, big cuddle!
A really BIG one. And strum those strings, strum ‘em!!!

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