Markets were in sleep mode for most of the session, ahead of the BoE monetary policy decision, as well as the ECB’s press conference where the President is unlikely to outline any new measures and instead reiterate that the ECB stands ready to do whatever is necessary. The BoE held both their rates and asset purchase target unchanged, however it is widely expected that the central bank will boost the facility by another GBP 50bln in November. Today’s supply from both Spain and France was easily absorbed by the market, both were supported by the recent decline in bond yields. Going forward, apart from digesting comments from Draghi, market participants will get to see the release of the latest weekly jobs report, durables revisions and the minutes from the FOMC.
Equity markets continued to edge higher today as market participants grew hopeful that a full scale bailout of Spain will take place in the very near future. So much so that even though reports that Spain is to seek bailout this weekend was denied, the risk on sentiment held strong. As a result, SP/GE and IT/GE bond yield spreads tightened further, with IT 10s now yielding close to 5%. The renewed sense of security saw EUR/USD squeeze higher towards the psychologically important 1.3000 level, while GBP/USD also benefited from a weaker USD and is trading in minor positive territory in spite of another round of disappointing macro data from the UK. Going forward, the second half of the session sees the release of the latest ISM New York index, as well as the regular weekly API report. Both the BoE and the Fed are due to conduct another round of asset purchases at 1445BST and 1600BST respectively.
The "mañana" approach to fiscal management, that Spain is known for, presented what is generally perceived as overly optimistic growth forecasts for 2013 and lacked details on structural reform resulted in another risk off session. As a result, Spanish stocks continued to underperform (IBEX seen lower by over 5% on the week), with 10y bond yield spread wider by around 12bps as market participants adjusted to higher risk premia. The state is due to sell 2s and 5s next week, which may also have contributed to higher yields. As a reminder, Moody’s review on Spain is set to end today, however there is a chance that the ratings agency may extend the review for another couple of months or wait until the stress test results are published to make an announcement. In other news, according to sources, Greece could return to its European partners for a Spanish-style rescue of its banking sector, as the country is looking to ease the burden via another writedown of its debts or a strong recapitalisation of its banks (no official response as yet). Going forward, the second half of the session sees the release of the latest PCE data, as well as the Chicago PMI report for the month of September.
Risk-averse sentiment was prevalent throughout the session, after both Spain and Italy sold bonds/T-bills, which attracted weak bidding and hence saw lower than exp. b/c. In addition to that, yields on 3m and 6m Spanish T-bills were higher, with some pointing to the fact that the Treasury has been forced to step up its T-bill issuance to meet its zero net funding target (higher supply). As a result, peripheral bond yield spreads are wider by around 9bps, with Italian bonds underperforming given the supply later on in the week. This underperformance was also evident in the equity space, where the domestic stock exchange is seen lower by over 1%, compared to DAX which is only lower by 0.4%. In the FX space, firmer USD weighed on both EUR/USD and GBP/USD, both trading in close proximity to intraday option expiry levels.
Risk-averse sentiment dominated the first half of the session today, as market participants digested yet another disappointing macro economic data release from Europe (German IFO), which fell for a fifth consecutive month. In addition to that, EU’s Van Rompuy said that he sees tendency of losing the sense of urgency, likely pointing the finger at Spain which is yet to request monetary assistance to prevent another speculative attack. It remains unclear when the official request will be made, but there is a risk that the application will only take place after regional elections in late October or even after the Eurogroup meeting in November. Finally, German finance ministry spokesman said that leveraging the ESM to EUR 2trl, as reported by Der Spiegel over the weekend, is not realistic and called the report completely illusionary. As a result, peripheral bond yield spreads are wider, with Italian bonds underperforming as markets prepare for this week’s supply from the Treasury. Heading towards the North American cross over, EUR/USD is seen lower by around 75pips and is trading in close proximity to the 1.2900 level, with bids said to be placed below. Talk of dividend related buying in GBP/USD, as well as EU budget related selling in EUR/GBP by two different UK clearers helped support GBP/USD. Going forward, there are no major economic releases set for the second half of the session, but the BoE will conduct its latest APF and the Fed will buy between USD 1.5-2bln in its latest POMO.
As we enter the North American cross over, equity indices in Europe are seen higher, supported by telecom and health care sectors. There was little in terms of fresh news flow and instead the price action was largely driven by expiration of various futures and option contracts. On that note, it is not only the quadruple witching day, but also quarterly S&P rebalancing. As such, brief spells of volatility will be observed as market participants close out remaining positions. Looking elsewhere, range bound price action was observed in the fixed income market, where the benchmark German Bund is currently trading in close proximity to 140.00 level. Talk of demand from Middle Eastern accounts in EUR/USD earlier in the session saw the pair trip buy stops above 1.3000 and then above 1.3025. GBP/USD was a direct beneficiary of USD weakness, which in turn pushed the pair above 1.6300 level (touted option barrier). Going forward, the second half of the session will see the release of the latest CPI from Canada.
Stocks fell in Europe today, that’s in spite of the fact that German investor confidence rose the first time in 5 months (ZEW), as market participants focused on somewhat unfavourable auction schedule for Spain, which may force the Treasury to raise its T-bill issuance in order to meet its zero-net funding target. As a result, Bunds traded higher throughout the session, with the shorter-dated Spanish and Italian bonds underperforming (Italian and Spanish 2s up by c.3bps). Of note, Spanish 10y bond yield has risen back above 6% and given the upcoming supply, there is a risk that yields will continue to rise and flatten the curve. On that note, the Spanish Treasury is set to sell a new 3y benchmark and a 10y re-opening this Thursday, which proved notoriously difficult to sell in the past. Spain is also planning to issue EUR 8bln in private placements with EUR 3bln on Sep-21st and EUR 5bln in mid-October.
Now that the German high court ruling is out of the way and the Dutch elections results produced no real surprises the European equity markets are essentially flat with position squaring evident ahead of the keenly awaited FOMC rate announcement and accompanying press conference. Bund futures have followed a similar trend having ticked higher through the morning with some modest re-widening of the Spanish and Italian 10yr government bond yield spreads, wider by 9bps and 5bps respectively, also in Euribor will did see a decent bid after comments from ECB member Hansson who said the ECB council must now start debating a negative deposit rate. Today’s supply from Italy and Ireland had little impact on the general sentiment, that’s in spite of the fact that demand for debt issued by the Italian Treasury was less than impressive to say the least. Also of note, Catalan President Mas said that Spain should debate staying in the euro, which unsettled the market somewhat. Overnight it was reported that the US Navy have stepped up their security presence in Libya by ordering two warships to the country's coast, according to US officials. This is after the US ambassador to Libya and three American members of his staff were killed in the attack on the US consulate in the eastern city of Benghazi by protesters earlier in the week. Today, there were more reports of demonstrations in the region, however supplies remain unaffected.
Equities traded lower in Europe today as market participants continued to book profits after a rally to 13-month highs on growing concerns that even though the Constitutional Court in Germany will dismiss the injunction, it may enforce certain conditions. In addition to that, yesterday’s comments from Spain’s Rajoy who said that the new ECB backstop makes a bailout for his country less urgent. As a result, there is a risk that markets may scale back their expectations of an imminent full-scale bailout and in turn lead to another speculative attack on Spanish bonds. This, together with touted profit taking, saw the short-end in Spain and Italy come under pressure (2y Spanish yield up 8bps and 2y Italian yield up 7bps). In turn, this supported duration assets throughout the session. Looking elsewhere, the looming elections failed to deter investors from the latest DSL tap, which drew a record low yield. Going forward, the second half of the session will see the release of the latest Trade Balance data from the US, as well as the weekly API report. In addition to that, the US Treasury will sell USD 32bln in 3y notes.
So what's driving these high ass oil prices? Fundamentals, paper pushing derivatives, fraud, or fear? A common sense discussion ensues...
Although the supply and demand factors do not seem to support the current price levels, there are plenty of other events to sustain and add premium.
Reports that the ECB is discussing a new variation for sovereign bond purchases involving secret caps for interest rates failed to support peripheral EU bonds and instead provided market participants with an opportunity to book profits following recent strong gains. As a result, 10y peripheral bonds with respect to the benchmark German Bund are wider by around 12bps, with the shorter dated 2y bonds wider by around 15bps. This underperformance by peripheral EU assets is also evident in the stock market, where the IBEX and the Italian FTSE-MIB failed to match performance of the core indices today. The latest PMI data from the Eurozone, as well as China overnight underpinned the need for more simulative measures either from respective central banks or the government. While the PBOC continues to refrain from more easing, the release of the FOMC minutes last night revealed the members favoured easing soon if no growth doesn’t pick up.
European bourses are down at the North American crossover, all ten sectors in the red, on thin volumes and a distinct lack of data and news flow from the EU and the UK. The risk-off tone in part attributed to the much wider than expected Japanese trade deficit for July, whose exports also fell the most in six months, raising investor concern once again that Asian economy as a whole is stalling. Elsewhere, investor caution over the Greek debt crisis is once again mounting, as EU’s Juncker visits Athens today to meet with the Greek PM Samaras. Overnight it was reported that Greece would present EUR 13.5bln in budget cuts today, higher than the previous EUR 11.5bln, and whilst the country is not asking for more money, Samaras might request more time to implement them. Lawmakers in Netherlands remain critical of providing more aid for the country and continue to push for more reforms, such as spending cuts and privatization, with the Dutch Finance Minister de Jaeger commenting earlier that it is not a good idea for Greece to get more time.
European equities are trading flat to minor positive territory at the North American crossover having pared losses made following the weaker than expected Japanese Q2 preliminary GDP and reports from Chinese press that China's RRR cut might have been postponed as the People's Bank of China's reverse repo activity still satisfies liquidity needs. Elsewhere, Bank of America cut China's growth forecast from 7.7% to 8.0% for the year, commenting that the country's ability for monetary easing was constrained by house prices. Volumes have been particularly thin, however, and as there is no economic data scheduled for release from the US, it is likely to stay that way. Greek Q2 advanced GDP surprised markets, contracting at a slower pace year-over-year than Q1 and than was expected, boosting risk appetite across the board. As such, Spanish and Italian spreads are seen tighter by 12.6bps and 9.1bps respectively, with the Spanish 10-year yield holding below the key 7% and the Italian's under 6% despite the Italian government debt coming in at a record high of EUR 1972.9bln.
European markets opened lower as risk-off was observed across the asset classes as participants reacted to the disappointing data from China overnight. Continental equity futures have moved horizontally throughout the session so far with little newsflow or influential data to sway price action. Heading into the European open, little has changed as all European indices are in the red, being led lower by consumer goods and utilities. China posted a sharp narrowing in their trade balance surplus to USD 25bln from USD 32bln in June, as the growth in exports slows across the month. As such, it is not a surprise to hear the usual market chatter of the Chinese central bank taking an imminent move to cut their Reserve Requirement Ratio today. However, as nothing has materialised, the riskier assets have not seen any significant lift from the talk.