Archive - Nov 14, 2011

• Obama to China: Behave like "grown up" economy (Reuters)
• President Hu: US woes not yuan-related (China Daily)
• U.S. readies defenses against Europe spillover (Reuters)
• Another one discovers that Gross is in fact net: Euro Risks Hit Banks (WSJ)
• Global security trumps economics at APEC conference (Washington Post)
• New Italian, Greek governments race to limit damage (Reuters)
• Asia a priority for Canada after U.S. delays Keystone (Reuters)
• All major economies headed for slowdowns: OECD (Reuters)
• Japan Ends Recession as Quake Scars Heal; Outlook Dim (Guardian)
• Bundesbank warns against intervention (FT)

Unlike in the past week, when the ECB had a clear agenda of getting Berlusconi out, and thus let 10 Year BTPs tumble to a record low price of 82 cents before even pretending to intervene, all it took today was a modest drop from 88.80 to 87.80 before Mario Draghi sent his bond traders out in the market lifting every offer. As for the sell off catalyst: the auctioning off of €3 billion in 5 year bonds which cleared at a record 6.29%, the highest pricing yield since 1997. This compares to the last auction of 5.32% on October 13 and a bid to cover at the current auction of 1.47 compared to 1.34 last. Yet once again, mysteriously like last week's 1 year auction, the bonds came in well inside of the prevailing yield just before the auction which was 6.43%. Once again one wonders: precisely how do these auctions continue to clear with no tail whatsoever, and why would anyone buy the bonds in the primary market at a price that is much higher than the secondary one. But we can wonder: in the meantime the EFSF will assure us it is not a ponzi scheme. Either way, just as the 10 Year BTP price threatened to take out early support following a very aggressive selloff beginning just as the 3 Year came to market, the ECB stepped in and started buying bonds up. No wonder the EURUSD is well below the Friday closing price, and trading at 1.3670 at last check. For those interested, below are the kneejerk Wall Street analyst responses to the Italian auction.

All you need to read.

Speaking at the EuroFinance conference, the recently chatty Jens Weidmann makes it clear that expecting the ECB to save the day is not a good idea. His comments, via Bloomberg, were enough to crack EURUSD under 1.37 and take EURJPY below Friday's lows - dragging risk assets lower across the board.

 

*ECB'S WEIDMANN SAYS ITALY HAS `WORRYINGLY' HIGH DEBT BURDEN

*WEIDMANN: ECB MUST NOT SOLVE SOLVENCY ISSUES OF STATES, BANKS

*WEIDMANN SAYS MARKET FORCES HAVE `IMPORTANT DISCIPLINARY' ROLE

*WEIDMANN SAYS USE OF MONETARY POLICY FOR FISCAL NEEDS MUST STOP

Italian 10Y spreads are almost back to unch after being 11bps tighter at their best.

Some early excitement in credit markets with XOver and senior financials gapping tighter - trying to catch up to equities - has started to show signs of weakness as EURUSD just lost late Friday swing lows and sovereign spreads start to decompress. Broad risk markets are indicating more weakness for S&P futures as US TSYs are rallying. The shift in EUR has had its largest impact on Silver so far as dollar strength is a drag on commodities (though we note Brent priced in EUR is +1%) - though copper enjoyed the Asia session gaining over 2.5% from Friday's close. With the Italian bond auction later this morning it is no surprise that EFSF bonds are well off their tight spreads of the morning already and as EUR-USD swap spreads adjust, they are pointing to further deterioration in EURUSD from here. This modest pessimism is already reflected in the short-end underperformance across the European sovereign yield curves as flatteners appear popular once again.

All is well ... the EFSF will quietly monetize the radiation ...

UPDATE: TSYs actually moving most on this news, yield down 1-2bps and 2s10s30s 3-4bps flatter pulling risk lower.

Given the extent of our discussions both today and over the last two weeks of the EFSF, Moody's confirmation of all that we have said should come as no surprise. In their Weekly Credit Outlook the rating agency, that hasn't accidentally downgraded FrAAAnce recently, cites weak demand and investor's cold reception of proposals as betraying the limits of EFSF's powers. This development calls into question the ability of the EFSF to fund itself in the markets at low cost. The success of the EFSF as a tool to stabilize sovereign debt prices and the success of the current euro area-wide support mechanism comes into doubt if that ability is compromised. Clearly traders are also starting to wake up to this reality as EURUSD drops below Friday's close and given the size of sovereign issuance on deck this week, it is not surprising.