Overnight Sentiment: Nervous With A Chance Of Iberian Meltdowns

Tyler Durden's picture

As traders walk in this morning, there are only two numbers they care about: 522 bps and 6.15% - these are the Spanish 5 year CDS and 10 Year yields, respectively, the first of which is at a record, while the second is rapidly approaching all time wides from last November. Needless to say Europe is no longer fixed. And yet despite a selloff across Asia, Europe is so far hanging in, as are the futures courtesy of a persistent BIS bid in the EURUSD just above 1.30 to keep the risk bottom from falling off. It remains to be seen if they will be successful as wrong-way positioned US traders walk in this morning.

Previewing key macro events are SocGen, Citi and Morgan Stanley via Bloomberg. As expected, all are on pins and needles ahead of Thursday's 2 and 10 year bond auctions.


  • This Spanish crisis won’t go away while everyone is getting stressed about it, Kit Juckes says in note; Thursday’s 2-yr, 10-yr bond auctions in Spain will probably become a magnet for worry
  • Assumes “risk will be off,” EUR/USD 1.30-13430 range will finally be broken


  • Week ahead may not provide any meaningful respite; renewed focus on the periphery means Spanish bond auctions, G-20 meeting of finance ministers on Thursday high on the agenda
  • Indications of weak investor demand for government debt may translate into higher Bond yields; in the absence of ECB purchases may add to headwinds for the single currency
  • At times of market uncertainty safe haven currencies USD, JPY could remain supported; outperformance of U.S. economy will remain an important driver of EUR/USD via its impact on EUR/USD rate spread
  • An escalation in investor fears could weigh on the likes of SEK, CAD and AUD

Morgan Stanley:

  • EUR/GBP on the selling list, Hans Redeker says in note; says while EMU deals with the effects of its debt turmoil, U.K. is seeing signs of labour and housing market stabilization
  • Ahead of tomorrow’s 12-mo, 18-mo Spanish bill auctions mkts will watch sovereign credit spreads carefully; with bank shares under selling pressure, the willingness to add to the carry trade may be reduced
  • It has become clear IMF unlikely to agree to increase support for Europe at next weekend’s meeting; the EU130b Greek aid package will be affected if IMF doesn’t agree to increase support.

Below is a detailed summary of overnight action from Bank of America

Market action

Overnight, most Asian equity markets sold off overnight as Asian investors worried about weaker consumer sentiment in the US and the unresolved debt crisis in Europe. The worst performing market was the Japanese Nikkei which fell 1.7%. The Korean Kospi lost 0.8% while the Hang Seng fell 0.4%. The Shanghai Composite also finished lower losing 0.1%. On the flip side, the Indian Sensex managed to close up 0.3%.

After starting the day lower European equities are now trading 0.4% higher in the aggregate. The major European equity markets are trading roughly in line with the broader aggregate. The one market that is noticeably higher is the French CAC, up 0.6%. At home, futures are pointing to a modestly higher opening. The S&P 500 is set to rise 0.3%.

In bondland, Treasuries are trading flat except for the long bond which is 1bp higher at 3.14%. In Europe, the UK gilt and the German bund are both rallying with their yields down 1bp to 2.03% and 1.72%, respectively. The yield on the Spanish 10-year yield has crossed the 6% mark after rising 12bps to 6.07%. Italian yields are rising as well with the 10-year note currently trading at 5.58% after climbing 8bp.

The dollar is strengthening in the currency markets. The DXY index is up 0.2%. The strong dollar is helping push the price of commodities lower. WTI crude oil is off 42 cents to $102.42 a barrel and gold is down $9.05 an ounce to $1,649.05.

Overseas data wrap-up

Quiet day, there was nothing on the overseas data calendar that caught our attention.

The week's events

We will be watching the March reports on retail sales and housing starts for any lingering signs of a positive boost from the recent warm weather. The reported value of retail sales should also benefit from higher gasoline prices; conversely, weaker auto sales should act as a drag. We also are looking for initial jobless claims to tick back slightly to 370,000 after their surprise jump for the week of April 7th to 380,000 -- some of this increase may be due to the timing of the Easter holiday. Finally, with the next FOMC policy meeting scheduled for April 24 and 25, the calendar of Fed speakers is relatively light.

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bank guy in Brussels's picture

Fascinating report on what may be the radical EU solution, given the impossibility of bailing out Spain and Italy, from Bruce Krasting here on ZeroHedge.

From Bruce's talk with a French-government related source in Paris, what may happen is the wealthier EU countries, guarantee to cover interest payments and trade deficits for countries like Spain, Italy, Portugal and Ireland ... but NOT bond rollovers.

Instead of repayment of principal, bondholders get 3-year new bonds at EU-determined yield rates, rolled over indefinitely ... yes, technically a 'default' ... and 'breaking' the EU bond market ... but as it seems to be essentially already broken anyway ...


GeneMarchbanks's picture

That's the rumour, guy, a few blogs have reported this while supposedly timing is after French elections.

francis_sawyer's picture

That's no 'fix', it's just more can kicking...

LongSoupLine's picture

The ramp in futures overnight is total crooked bullshit, but the upside is that it allows me to add to some shorts if it can hold to the open.

stopcpdotcom's picture
EUROBLOWN: ClubMed money stampedes northwards as French lay plans to cut the bond market’s throat .



XtraBullish's picture

This is all EQUITY-FRIENDLY as the CTRL-P is about to go ballistic. Inflation VS. DEBT DEFLATION any day of the week...that's the chosen path. However, keep money from seeking the p.m.'s by continually hammering them and Larry Summer's "Behavioural Finance Model" will appear to "work". Investors are exhibiting anti-Pavlovian responses to what would normally be "bell-ringing salivation" in the gold-silver arena. Debt monetization is inflationary but it is not gold-friendly if every bond auction Ponzi is met with artificailly-managed yields and prices. When the currency regimes of the U.K., U.S., and the EU all go into Crash Mode, Larry Summers will have a nervous breakdown and be found crying hysterically in the JPM boardroom while Blyth and Jamie quietly smile and slink off to the Caymans...It takes a little over 600 U.S. currency units to buy one share of AAPL; when it takes 6,000 U.S. currency units to buy one share despite no change in earnings, P/E. DNPV etc, the bullish effect of CTRL-P will exert itself on the markets, JUST LIKE ZIMBABWE. So just BTFD in stocks and short U.S./U.K./EU currency units with liberal enthusiasm. And CAVEAT LOBOTOMUS.

EconSammie's picture

The real news is what is happening to Spanish three year bonds where all the 3 year ECB LTRO money was targeted. Take a look at what is happening there.

You don’t get much for a trillion Euros these days


As the situation deteriorates you may be wondering about the just over a trillion Euros of three-year liquidity that the European Central Bank provided in its December and February operations. As I have explained before Italian and Spanish banks used it as a source of cheap cash (initially 1%) to invest in higher yielding bonds, and rather conveniently these happened to be their own sovereign bonds.


If we look at the Spanish government bond market we see the effect of this. Spain’s banks mostly invest around the three year region and at this point you may be thinking that the three year term of the liquidity offer was not a coincidence and you would be right! If we look at the yield on Spain’s three year bonds we saw it plummet from over 6% in late November to 2.7% at the beginning of March. This is a lot nearer to debt monetisation that the media have cottoned onto. But if we return to today’s theme we have seen rises in the yield since then to above 4% at the end of last week. And this has been reinforced by a rise of 0.22% to 4.37% this morning.





Good job the problem is solved!


Element's picture

Second half of 2012 is going to get real interesting ... not contagion ... more like conflagration.

(and Europe had better keep in Russia's good books ... if they don't want to freeze in winters)