Europe has opened a new week with a modestly schizophrenic session: after hitting a multi year low against the USD and an 11 year low against the Yen, the Euro has seen a constant rise and traded nearly 100 pips higher last at 1.2770 on renewed hopes that today's Merkozy meeting would finally yield success. While that is clearly an utter delusion, with the abosolute record of shorts in the EUR as we pointed out last Friday, the smallest move higher can generate an avalanche of covering, and as we said previously [8]a "potential" margin hike by the CME at any point in Euro contracts would leads to a QE-like surge higher in the EUR. If only briefly. Elsewhere, bond yields were mostly unchanged with the 10-yr Italian yield -3bps to 7.1% after rising as much as 4bps to 7.17% earlier; the 10-yr Spanish yield -5bps to 5.66%; was +1bp to 5.72% earlier; the 10-yr bund yield +2bps to 1.88%, first rise in 3 days. Most importantly, but no longer surprisingly, the ECB Deposit Facility usage soared to a new all time high of €464 billion, an increase of €199 billion since the LTRO hit the bank balance sheets on December 21, which accounts for virtually all the non-rolled cash. Simply said, Europe remains in suspended animation with hopes that a deus ex (now that the aliens have been downgraded from "possible" to "interference") will materalize preventing an allout spread collapse.
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Bloomberg completes the overnight picture:
- Merkel, Sarkozy meeting to agree on fiscal consolidation measures designed to shore up concerns about EU sovereign debt most EU sovereign to bund yield spreads modestly tight, 1-yr euro basis swap +2.5bps to -86.00
- Most U.S. futures, Treasury yields higher
- US$ down vs most currencies {FIFW WCRS <GO>}; A$ recovering from overnight losses as Pimco said RBA would have to cut target rate on China slowdown; most commodities modestly higher
- Key exception to generally positive sentiment: EU equities modestly lower on weaker than expected German industrial production -0.6%M/m vs est. -0.5%, adding to downside surprises for retail sales, factory orders last week