- Italy sold EUR 6.5bln in 5y and 10y BTPs this morning, solid b/c and competitive yields, especially when considering the uncertain political situation in Italy.
- Moody's also said that Italian election is indirectly credit negative for other pressured EU sovereigns.
- Fears rise that ECB plan has a weakness as the strings in the Eurozone bond buying programme may be its frailty.
Heading into the North American open, equities in Europe are trading in minor positive territory, underpinned by decent demand for today’s Italian 10y and 5y debt auction (equivalent to c. 41k Mar-Bund contracts). Nevertheless, Bunds remained bid throughout the session, while the Italian curve steepened this morning. In addition to that, the 5y CDS are up around 10bps. Of note, S&P and Moody’s released statements overnight commenting that while there is no change in Italy’s BBB+/Baa2 credit ratings just yet, the elections have underscored that risks to carrying out structural and fiscal reforms are substantial.
The most likely outcome in Italy seems to be a caretaker government. However there is a risk that it will take weeks and potentially months to reach some sort of compromise which may just stifle any confidence left and lead to another speculative attack. As a reminder, Bersani called on all his opponents yesterday, including the much despised Berlusconi, to back a five-point programme of political reform, easing of austerity and job promotion.
Looking elsewhere, even though there is still a risk that the sovereign debt crisis will reignite, EUR/USD trended higher throughout the session, driven by a weaker USD, as market participants remained hopeful that the Fed will remain in an accommodative mode. The Chairman is due to testify to the House later on in the session, the statement is expected to echo the one made yesterday. Going forward, market participants will also get to digest the release of the latest durables report, as well as the weekly DoE report. The US Treasury will conclude this week’s planned issuance with a sale of USD 29bln in 7y notes.
China's state economists see Q1 GDP at about 8% and Q1 CPI about 2.6%, citing the state information center on GDP. The paper also notes that CPI growth for the month of February is expected to be around 3%, or more likely higher, because of the Chinese Lunar New Year holidays.
EU & UK Headlines
Italian BTP auction results:
- Italy sells EUR 2.5bln 3.5% 2017 BTPs, bid/cover 1.61, Prev. 1.3 (yield 3.59%, Prev. 2.94%)
- Italy sells EUR 4bln 4.5% 2023 BTPs, bid/cover 1.65 (yield 4.83%)
The 10y offering which was the 1st tranche benefited from 7bps pick up in yield on z-spread basis to the 5.5% 2022 line, while the 5y was trading at its tightest level on ASW to the neighbouring 5.25% 2017 line. The disorganised sell-off yesterday also proved supportive of demand.
S&P said Italian ratings are not immediately affected by election results. While analysts at Moody's said Italy's inconclusive election outcome is credit negative. Moody's also said that Italian election is indirectly credit negative for other pressured EU sovereigns.
Loss of confidence in Italy could raise borrowing costs in weaker euro-zone nations and reignite debt crisis.
Fears rise that ECB plan has a weakness as the strings in the Eurozone bond buying programme may be its frailty. (FT)
With a long and potentially unstable period ahead for Rome as it attempts to cobble together a new government, Italy may be with out the kind of credible policy decisions that are pre-conditions to gaining access to ECB assistance.
Although the ONS in the UK left its estimate for the Q4 unchanged at -0.3%, the agency said that growth in the Q3 was 1% rather than 0.9% and that the economy shrank in the Q1 of 2012 not by 0.2% but by just 0.1%. The changes pushed up the ONS estimate for annual 2012 growth from zero to 0.2%.
BoE’s Bean said that discussions about charging banks to deposit money were "blue-sky thinking" and the Bank had no plan to introduce negative interest rates now. As a reminder, BoE’s Tucker said on Tuesday that the central bank was considering whether negative interest rates were a feasible way to boost the economy.
Pan EUR agg BarCap month end +0.04y
Sterling agg BarCap month end +0.07y
The Chairman is due to testify to the House later on in the session, the statement is expected to echo the one made yesterday. During the first testimony to the Senate on Tuesday, the chairman defended the asset purchase program and reiterated readiness to support growth. He also tried to downplay concerns that the central bank’s approach to monetary policy will lead to asset bubbles.
US Treasury agg BarCap month end +0.10y. As a reminder, although the extension is much larger than the +0.03y in January, the impact on the curve is expected to be somewhat muted as there is seasonality bias during the refunding months (Feb, May, August and November).
Heading into the North American open, equities in Europe are trading in minor positive territory, underpinned by decent demand for today’s Italian 10y and 5y debt auction (equivalent to c. 41k Mar-Bund contracts). However it remains to be seen whether these gains will be sustained given the uncertainty over the situation in Italy. Nevertheless, gains are being led by telecommunications and oil & gas sectors.
Apple shares spiked to session highs late yesterday on unconfirmed talk of the co. announcing a stock split at today's shareholder meeting.
The Italian market regulator yesterday banned short-selling of shares in Banco Popolare and Mediolanum. Furthermore, UK's FSA says restricting short selling in Banco Popolare, Mediolanum, Intesa and Banca Carige.
As part of the STOXX Benchmark Quarterly Review: Polymetal International, BCO Communications, Telefonica Deutschland, OTE, Talk Talk and Direct Line added. SGL Carbon, PostNL, Logitech International, Petropavlovsk, Bankia and Jardine Lloyd Thompson removed.
For a full rundown of EU equity news, please refer to European Equity Opening News report located in research section. Complete rundown of US equity news will be available on the website at 1400GMT (0800CST)
Even though EUR/USD trended higher this morning, there is a risk that further bond yield spread widening in Europe, on the back of concerns regarding the political instability in Italy, may see the pair break through the key 1.3000 level to the downside. Key support level is seen at 1.2998, which once broken opens the door towards 1.2877 which is the mid-point of the July 2012 to February 2013 advance.
While the DPJ signaled resistance to one anticipated deputy pick, Iwata, an advocate of greater government oversight of the BOJ, two other opposition parties showed support, increasing the chance that Abe gets approval for his full slate. Despite the latest setback, the price action for USD/JPY remains in a bullish trend. However the bias may swing should the pair break through the 62% retracement of the Jan-23 to Feb-25th advance at 90.62.
AUD/USD trended lower and looks set to make a test on the key support at 1.0149 which is the October 2012 low. Once broken, there is a risk that the pair will slide towards the July 2012 low at 1.0098. Of note, S&P said that high household debt levels and house prices continue to undermine Australia's economic outlook. But the global credit ratings agency has reaffirmed the nation's top credit rating, saying the risks are "largely mitigated for now".
WTI crude futures are trading in flat to minor positive territory today following the conclusion of nuclear talks in Kazakhstan between the P5+1 nations and Iran. Focus will now likely turn to today's DoE inventory numbers where another build is expected in the headline figure.
The Obama administration will likely reject the Keystone XL pipeline, a Republican member of Congress said Tuesday in Washington due to pressure from environmental groups.
An Iranian official said the P5+1 nations and Iran ended two days of talks over Iran's nuclear program with a pledge to hold further discussions at both political and technical levels. The US says no offer was made to Iran to ease oil and financial sanctions and Iran carefully considered the offer in talks although the country has offered its own proposal and ideas. Separately, according to press reports, Iran is developing a second path to a nuclear weapons capability by operating a plant that could produce plutonium, satellite images show for the first time.
API US Crude Oil Inventories (Feb 22) W/W 904k vs. Prev. 2961k
- Gasoline Inventories (Feb 22) W/W -1444k vs. Prev. -122k
- Distillate Inventory (Feb 22) W/W -1743k vs. Prev. -1641k
- Cushing Crude OK Inventory (Feb 22) W/W -206k vs. Prev. 546k