- Debt turmoil and political uncertainty in Spain and Italy witnessed widening of the Spanish/German and Italian/German 10-year government bond yield spreads, despite decent T-Bill auctions from Spain. Also, yield on the Italian 10-year government bond breached the key 7% level to the upside
- According to the ZEW, there will be at least one negative quarter in Germany, most likely in Q1 2012
- BoE's King said he expects inflation to fall back sharply in the next 6 months, and will reach around the BoE’s target by the end of 2012
- SNB’s Jordan said that the SNB would act if the economic outlook and deflation trends demand
Despite the release of inline GDP reports from France and Germany, which temporarily alleviated concerns over the economic slowdown, the never-ending uncertainty over the sovereign debt crisis and in particular whether both Spain and Italy will be forced out of borrowing markets dominated the sentiment today. The risk-averse sentiment also stemmed from an unexpected contraction in the Dutch GDP, which is one the AAA rated nations in Europe. As a result, it was not just the Italian, Spanish and French government bonds yields that widened in respect to the EU benchmark German Bund, but also the 10-year Dutch issue which widened by around 15%. In terms of the Italian/German yield spread, that now trades above 500bps level while the Spanish/German yield spread crossed the 450bps threshold where the LCH begins to review for possible margin hikes. Unconfirmed reports of ECB buying Italian paper proved ineffective yet again and touted real money accounts selling in good size proved too much for the prudent ECB to control. As has become the norm, price action in fixed income markets was reflected in the FX space, where EUR came under broad based selling pressure. Apart from a slew of GDP reports, the release of the latest ZEW survey confirmed the economic slowdown in the region which was also echoed by ZEW economist who said he expects at least one negative quarter, most likely Q1 of 2012 in Germany. In terms of other pertinent events, the latest inflation report by the ONS in the UK showed that inflationary pressures continued to ease, with Y/Y now at 5.0% vs. Prev. 5.2%.
Going forward, attention in the latter half of the session will turn to the macro-economic data release from the US in form of PPI and retail sales. In addition to that, the Fed is due to conduct its latest round of Treasury Purchases, this time targeting Nov.17-Nov.19 maturities. In terms of speakers, Fed's Evans and Fed's Fisher are scheduled to present remarks on the economy.
China Investment Corp. cannot dispose of its holdings of debt issued by major foreign countries because it will hurt the value of its own portfolio if it does so, according to the general manager of the sovereign fund. (RTRS)
According to the IMF, China’s biggest commercial banks face systemic risk if a combination of credit, property, currency and yield curve shocks that could be withstood in isolation were to occur together. China needs to act quickly because it is vulnerable to destabilising asset bubbles. (RTRS)
The European debt crisis is raising the odds of an US recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Fed. (RTRS)
In other news, US lawmakers might opt to postpone tough tax decisions until next year as they struggle to forge a deficit-reduction deal over the coming week, congressional aides said. (RTRS)
Elsewhere, most US states, counties, cities and towns can weather the tough economy as well as expected cuts in federal aid according to Moody’s. While there are likely to be rating and outlook changes over time, the rating agency does not expect wholesale shifts in the rating distribution as most issuers have shown they can made adjustments to address budgetary pressures, Moody’s said. (RTRS)
EU and UK Headlines
According to a report by the Lisbon Council, France’s inability to make rapid adjustments to its economy is a serious concern and should be ringing alarm bells for the Eurozone. The Report ranked France 13th out of 17 for its overall health, including its growth potential, employment rate and consumption, and 15th for its progress on economic adjustments, particularly on reducing its budget deficit and keeping a lid on unit labour costs. (RTRS)
• Eurozone GDP SA (Q3 A) Q/Q 0.2% vs. Exp. 0.2% (Prev. 0.2%)
• German GDP SA (Q3 P) Q/Q 0.5% vs. Exp. 0.5% (Prev. 0.1%, Rev. to 0.3%)
• French GDP (Q3 P) Q/Q 0.4% vs. Exp. 0.4% (Prev. 0.0%, Rev. to -0.1%)
• German ZEW Survey Economic Sentiment (Nov) M/M -55.2 vs. Exp. -52.5 (Prev. -48.3)
• UK CPI (Oct) Y/Y 5.0% vs. Exp. 5.1% (Prev. 5.2%) (RTRS)
• Spanish 12-month T-Bill auction for EUR 2.6bln, bid/cover 2.10 vs. Prev. 2.30 (yield 5.022% vs. Prev. 3.608%)
• Spanish 18-month T-Bill auction for EUR 0.56bln, bid/cover 6.0 vs. Prev. 4.26 (yield 5.159% vs. Prev. 3.801%)
• Greece 13-week T-Bill auction for EUR 1.3bln, bid/cover 2.94 vs. Prev. 2.86 (yield 4.630% vs. Prev. 4.610%)
• Belgian 3-month T-Bill auction for EUR 1.830bln, bid/cover 1.45 vs. Prev. 2.41 (yield 1.575% vs. Prev. 0.957%)
• Belgian 12-month T-Bill auction for EUR 0.895bln, bid/cover 1.64 vs. Prev. 2.30 (yield 3.396% vs. Prev. 1.673%) (RTRS)
European equities traded lower during the session, weighed upon by political and debt turmoil surrounding the Eurozone, with Spain and Italy in focus. Financials underperformed its European peers, and particular weakness was observed in the Italian FTSE MIB and Spanish IBEX 35 indices. Elsewhere, strength in the USD-Index weighed upon oil & gas and basic materials sectors. Moving into the North American open, equities continue to trade lower, with financials and basic materials as the worst performing sectors.
Strength in the USD-Index weighed upon EUR/USD, GBP/USD and commodity-linked currencies, whereas EUR remained under pressure on the back of political and debt concerns surrounding Italy and Spain. In other news, GBP/USD lost strength following comments from BoE’s King that he expects inflation to fall back sharply in the next 6 months. Elsewhere, CHF remained weak across the board partly weighed upon by comments from SNB’s Jordan who said that the SNB would act if the economic outlook and deflation trends demand.
Also in news, Australian’s central bank considered leaving interest rates unchanged at its November policy meeting, but decided to deliver a modest cut due to benign inflation at home and mounting economic risks from Europe according to the Minutes of the Nov 1st meeting. The Minutes also showed the board discussed recent revisions to inflation data, which pointed to a moderation in price pressure following a pick up in the first half of the year. (RTRS)
WTI and Brent crude futures lacked any firm direction in early European trade as investors remained cautious in light of developments in the Eurozone and strength in the USD-Index heading into the North American open.
Oil & Gas News:
• OPEC will study the market situation at December’s meeting and there will be no problems within OPEC if there are no pressures from outside, according to Iran’s OPEC governor.
• Saudi Arabia will increase oil shipments to some Indianan refiners next year as they add plants and seek alternative supplies after a payment dispute with Iran according to people familiar with the matter.
• Iran’s oil minister has urged gas exporters to unify strategies to boost prices adding that pricing formula for gas exporters is only a proposal. The minister went on to add that Iran sees no impact of oil exports from sanctions and Iran is not losing market share for crude.