Oh where to begin. The weakness in the markets started late last night when Australia posted a surprising second consecutive deficit of $480MM on expectations of a $1.1 billion surplus (with the previous deficit revised even higher). This is obviously quite troubling because as we pointed out 3 weeks ago when recounting the biggest Chinese trade deficit since 1989 we asked readers to "observe the following sequence of very recent headlines: "Japan trade deficit hits record", "Australia Records First Trade Deficit in 11 Months on 8% Plunge in Exports", "Brazil Posts First Monthly Trade Deficit in 12 Months " then of course this: "[US] Trade deficit hits 3-year record imbalance", and finally, as of late last night, we get the following stunning headline: "China Has Biggest Trade Shortfall Since 1989 on Europe Turmoil." So who is exporting? Nobody knows, but everyone knows why the Aussie dollar plunged on the headline. The shock sent reverberations across Asian markets, which then spilled over into Europe. Things in Europe went from bad to worse, after Germany reported its February factory orders rose a modest 0.3% on expectations of a solid 1.5% rebound from the -1.8% drop in January. But the straw on the camel's back was Spain trying to raise €3.5 billion in bonds outside of the LTRO's maturity, where the results confirmed that it will be a long, hard summer for the Iberian country, which not only raised far less, or €2.6 billion, but the internals were quite atrocious, blowing up the entire Spanish bond curve, and sending Spanish CDS to the widest in over half a year.
To wit: Spain sold €972.6 million in 4.25% 2016 bonds, at a whopping 4.319%, nearly a full percentage point higher compared to 3.376% just a month ago on March 1, and at a lower Bid to Cover: 2.46 compared to 2.59. It also sold €489.5 million in 4.85% 2020 bonds at an average yield 5.338% vs 5.156% at the previous auction on Sept. 15. And while the bid to cover 2.963 vs 1.99 at the last, by then the horses were out of the barn. The result is a surge in Spanish CDS to 457 bps, +18, the widest since November 28, as well as a slide in bond price. with the yield on the 5 year bond surging27 bps to 4.53%, and the 10 Year spiking by 23 bps to 5.68%, both the highest since very early January.
And with the ECB meeting a day earlier, and expected to do absolutely nothing (what can it do? It was already sequestered all the worthless European collateral in exchange for Discount Window borrowings), and with the Fed supposedly on hold, there is nobody to provide that deus ex machina oomph so desired by the liquidity addicted markets, resulting in deep red across the board.
Some of the instant view responses from Reuters:
ACHILLEAS GEORGOLOPOULOS, RATE STRATEGIST, LLOYDS, LONDON
"The headline looks negative, because they raised 2.5 billion. That's what the market is focusing on. However, the bid/covers were quite satisfying.
"There was a choice to show the market they were not desperate to raise the full amount. But that hasn't paid off because the market only looks at the (total amount)."
"The market is pessimistic about Spain. Domestic banks...failed to provide reasonable bids. Pressure on Spain will continue throughout the day. It won't stop now."
ANNALISA PIAZZA, MARKET ECONOMIST, NEWEDGE STRATEGY, LONDON
"The Jan-15 looked quite rich vs the Spanish curve ahead of today's tap whilst the other two lines looked fairly priced. The Spanish debt has been under pressure over the past few weeks and yields were still rising this morning...Market dealers seem to look at fundamentals now, with risks of a deep recession undermining the positive effects of the large ECB liquidity injection.
"Demand was not bad but bid/cover ratios are far below what we have seen at the start of the year when the Spanish debt benefited from the effects of the LTRO, regained confidence and a massive short-covering."
MARC OSTWALD, STRATEGIST, MONUMENT SECURITIES, LONDON
"The market is going to be disappointed that they've only sold 2.6 (billion euros) against a target of 3.5.
"The question is how much of this is a function of say 'we're not going to accept scrappy bidding - we're so far ahead of our issuance plan that we're just not going to sell at some of the cheeky bids'?
"The fact that the yields have risen quite sharply, relative to their previous auctions, as much as this was already in the secondary market, there will be some disappointment on that."
PETER CHATWELL, INTEREST RATE STRATEGIST, CREDIT AGRICOLE, LONDON
"The results are a far cry from the blowout auctions we saw between December and February, which will no doubt be interpreted as the LTRO bid having dried up. There appears no problem in issuing the paper, but judging by the average yields at these auctions, demand is now much more price sensitive and a truer gauge of investor sentiment."
NICK STAMENKOVIC, RATE STRATEGIST, RIA CAPITAL MARKETS, LONDON
"The Spanish Treasury failed to raise the maximum amount and yields, bid to cover ratios are lower than the previous auctions and all in all suggests investors remain very cautious towards Spanish bonds at the moment. This auction adds to worries about the fiscal position, keeping Spanish bonds on the defensive. Every aspect of the auction was disappointing. We saw 10-year yields test 5.55 percent, the next key support is 5.72.
"Investors might demand a higher risk premium for buying Spanish bonds clearly that's the message from today's results. The market wants to see the fiscal consolidation measures being implemented and wants to see the economic picture improving."
Elsewhere, this is what German factory orders looked like split betweeen Eurozone and non-Eurozone orders. While China may be saving Europe for now, internally things are just imploding. As Goldman says "Domestic orders declined by 1.4%mom after +1.9%, while foreign orders rose +1.7% after -4.7%. There is a strong divergence between orders from within the Euro area, where orders are declining fast, and orders from outside the Euro area, which are back on an upward trend (see chart)."
And with that, after a 3 month hiatus, Europe is baaaaaack.