- Italy sells to the top end of the indicative range, alleviating earlier fears that demand for Italian securities may fall short.
- Gilt futures fall 10 ticks following the DMO selling 20-yr gilts with a soft bid/cover and a large yield tail.
- Eurozone Industrial Production SA (Feb) M/M 0.5% vs. Exp. -0.2% (Prev. 0.2%, Rev. 0.0%)
Heading into the US open, European stock markets are experiencing a mixed session with particular underperformance noted once again in the peripheral IBEX and FTSE MIB indices. The Portuguese banking sector specifically is taking heavy hits following overnight news from Banco Espirito di Santo that they are to issue a large quantity of new shares, prompting fears that further banks may have to recapitalize. The financials sector is also being weighed upon by a downbeat research note published by a major Japanese bank on the Spanish banking sector.
Elsewhere, the Italian BTP auction was released in a fragmented fashion showing softer bid/covers and the highest yield since mid-January in the only on-the-run line sold today. Similarly to yesterday’s auction, the sale was not quite as poor as some as feared. Italy sold to the top of the range and as such, the Italian/German 10-yr yield spread is now tighter by 13BPS, currently at 361BPS. From the UK, the DMO sold 20-year gilts with a lower bid/cover ratio and a large yield tail, prompting gilt futures to fall by around 10 ticks after the release.
Markets have been little-data driven today, however Eurozone Industrial Production did come in above expectations at 0.5% against a consensus reading of -0.2%.
Later in the session, participants will be looking out for US PPI data and the weekly jobless numbers.
The Japanese government has said CPI is flat in April, previously falling slightly in March, adding that the view change does not mean that deflation concerns have eased. The Japanese government kept their overall economic view unchanged. (Sources)
BoJ’s Shirakawa has said the BoJ will pursue powerful monetary easing as defeating deflation is an important task to ensure a sustainable recovery with price stability.
The Chinese economy likely grew 8.4-8.5% in Q1, according to government researcher and will likely grow 9.0% in 2012. The researcher forecasts the PBOC to cut the RRR 3-4 more times throughout the year. (Sources) The World Bank have also estimated the prospects for a Chinese soft landing remaining high and forecast Chinese inflation to ease to 3.2% in 2012. (Sources)
Fed’s Yellen has said that ‘highly accomodative’ policy is appropriate for the Fed, and the official leaves the door open for bond purchases if growth in the US disappoints. Fed’s Yellen makes the argument for low rates beyond 2014. (Sources)
Fed's Bullard said he is generally positive on the US economy and sees 3% GDP in 2012, but he was uncertain on rates staying low until 2014, noting that one should not read too much into one weak employment report. (RTRS)
EU and UK Headlines
Eurozone Industrial Production SA (Feb) M/M 0.5% vs. Exp. -0.2% (Prev. 0.2%, Rev. 0.0%)
Eurozone Industrial Production WDA (Feb) Y/Y -1.8% vs. Exp. -1.8% (Prev. -1.2%, Rev. -1.7%) (Sources)
Italian BTP Auction Results:
-Italy sells EUR 2.884bln 2.5% Mar'15 BTP, bid/cover 1.435, Prev. 1.56 (yield 3.89%, Prev. 2.760%) - Highest yield since mid-January
-Italy sells EUR 395mln 3.0% Nov'15 BTP, bid/cover 3.26, Prev. 2.37 (yield 3.92%, Prev. 3.770%)
-Italy sells EUR 687mln 4.5% Feb'20 BTP, bid/cover 2.195, Prev. 1.64 (yield 5.04%, Prev. 5.490%)
-Italy sells EUR 918mln 4.75% Aug'23 BTP, Prev. bid/cover 1.50 (yield 5.57%, Prev. 5.640%) (Sources)
The Italian auction was released in a fragmented fashion, keeping markets on edge with the main focus on the only on-the-run line, the Mar’15 BTP. The bid/cover was slightly softer and the yield increased, however many investors had feared worse, echoing yesterday’s Italian T-bill auction.
UK DMO sells GBP 2bln in its 4.25% Jun 2032 bond with a B/C 1.39 (Prev. 1.62), yield tail 0.9bps, price tail 15 ticks.
Gilt futures fall 10 ticks lower following the DMO's gilt auction with a large yield tail and soft bid/cover ratio. (Sources)
ECB’s Liikanen has said Spain must keep its commitments and ensure the measures it takes to balance the budget apply to both central and local governments. ECB's Knot said that Spain is currently the biggest problem in Euro-zone, having stalled reforms amid easing market pressure and the country has to restore market confidence soon. (RTRS/Sources)
Greece confirmed the completion of the exchange of EUR 20.3bln of foreign law Greek bonds with a further EUR 1.1bln foreign law bonds having been tendered. (RTRS) The Greek Finance Minister also commented that the country is meeting the preconditions to receive capitalisation funds.
ECB’s Asmussen has said the Irish promissory note must be paid in line with plans, adding that Ireland have the means to honour the banking debt. The ECB official has also said that the bond-buying program could be resumed if the need arises. (Sources)
George Soros writes that the European debt crisis has entered what may be a less volatile, but more lethal phase, with the gap between creditor and debtor countries continuing to widen. (FT-More)
European equities are trading mixed heading into the US open, with the DAX and the SMI the only markets in the green. The FTSE MIB and the IBEX are trading lower than all others with peripheral worries arising once more. Overnight, major Portuguese bank Banco Espirito di Santo announced they would have to issue a large quantity of new shares, prompting fears that other peripheral banks may have to follow suit to recapitalise. As such, Banco Espirito di Santo are the worst performing stock in Europe today, currently trading lower by 14.40%. Another factor weighing down on Mediterranean banks is the publication of a downbeat research note by a major Japanese bank on the Spanish financial system.
Nokia are also experiencing losses following a profit warning and comments from Fitch ratings agency commenting that the warning highlights the challenges that the company faces in the transition process. As such, Nokia shares are underperforming an already risk-averse European market, currently lower by 7.28%.
One of the stronger performing equities in Europe today is Rio Tinto, outperforming the already top-performing basic materials sector following the publication of a Standard & Poor’s report deeming extreme Indonesian mining regulations as unlikely, helping the company trade higher by 3.25%.
Top performing sectors in the BE500: Basic Materials (+1.50%), Industrials (+0.70%), Consumer Goods (+0.54%)
Worst performing sectors in the BE500: Oil & Gas (-1.82%), Utilities (-1.18%), Telecommunications (-0.55%)
The AUD has taken some of the spotlight this morning following the much better than expected employment report from Australia in the overnight session, and as such AUD/USD trades with gains of close to a point, around the 1.0400 level. In other overnight commentary, the BoJ governor Shirakawa said that they will pursue "powerful easing" to help overcome deflation and as a result weakening of the JPY was observed across the board. Heading into the North American open USD/JPY is trading off session highs but still in positive territory, in close proximity to the 81.00 mark, which is a touted option expiry for the NY cut.
Elsewhere, EUR/USD has shrugged off some early weakness to trade firmly in positive territory as the Italian BTP auctions passed without as much incident as feared, which is also demonstrated by the tightening of the BTP/Bund yield spread. There has also been market talk of Middle Eastern names buying in EUR/USD this morning which has helped support the price action. GBP strength has also been observed, especially against the EUR, with the EUR/GBP cross hitting 3-month lows with safe haven flows away from Europe being mentioned as a potential driver of the move.
The energy complex is trading relatively flat on the session ahead of the US open. Elsewhere, the IEA have released their monthly oil report forecasting easing supply concerns and a modest increase in oil demand.
Oil & Gas News:
• The IEA monthly oil report has shown that Oil supply tightness has eased as sanctions cut Iranian output. With higher oil stocks and OPEC output, supply worries have also eased. The IEA said that the Oil market remains balanced even after the Iranian ban, and global oil demand is expected to rise to 89.9MBPD in 2012, a gain of 0.8MBPD on 2011, largely unchanged from last month.
• The Saudi oil minister Naimi has said Saudi oil production in April is at 10MBPD and if consumers want more, they can produce more.
• Goldman Sachs has lowered its average Natural Gas price forecast for 2012 to USD 2.40/MMBTU from USD 3.10/MMBTU.
• Iran is trying to skirt US and European sanctions by luring nations to buy its oil on highly advantageous credit terms, according to officials in the industry. Tehran has been offering a handful of potential customers in Asia, including India, 180 days of free credit with each month of credit estimated to amount to a discount of USD 1.20-1.50 per barrel.
• Fears are growing that a dispute over territory and oil reserves between Sudan and South Sudan could develop into all out war as South Sudan shuts oil production at a key region seized this week. Sudan have dropped six bombs near the South’s capital, according to the information minister for the state.
• The US and its allies will test Iran’s willingness to negotiate over the fate of its nuclear programme this weekend at the opening of talks billed as a last-ditch attempt to prevent Israeli strikes against Iranian nuclear facilities.