When it comes to sovereign bond issuance out of Europe the market either continues to be blissfully ignorant or is purposefully stupid: a few hours ago Spain sold €3.18 billion in 12 and 18 month bills, which was more than the expected €3 billion, and which, while coming at higher rates than before, set off a futures buying spark. What however has been pointed out over and over is that issuance of Bills that come due (by definition) within the LTRO's 3 year maturity is meaningless: all it does is concentrate and front-load maturity risk. After all what happens if and when the ECB were to ever not roll the LTRO forward? As such, the only true Spanish bond issuance test this week comes on Thursday when the country issues 10 year bonds. Everything else is merely designed to take advantage of a headline driven market. Specifically, Spain issued €2.09 billion in 364-day bills, which priced at an average yield of 2.623% vs 1.418% at auction on March 20, and at a 2.90 Bid to Cover compared to 2.14 previous. The yield on the second tranche, or €1.086 billion in 546-Day bills soared from 1.711% on March 20 to 3.11% as the Spanish curve again flattens, and despite the rise in Bid to Cover from 3.92 to 3.77, the internals were largely meaningless. Once again, when it comes to true paper demand, the only ones that matter are those that mature outside of the LTRO's 3 years. However today this sleight of hand has worked, and the Spanish 10 year is again under 6.00%, if only for a few hours, sending equity futures higher across the board. Elsewhere, proving once again that no other indicator is better at ramping up stocks, is the coincident indicator known as confidence, German Zew for April came in at 40.7 in April, much higher than expectations of 35, on what however we don't know: dropping markets, soaring inflation, or a return to a declining trendline. Even BofA noted that "There seems to be some disconnect between the latest releases of "hard data" (industrial production, orders received) and the investors expectations." Finally, the Royal Bank of India surprisingly cut its rate from 8.5% to 8.0%, as at least one country can not wait for Bernanke to do his sworn duty of CTRL-P'ing. Oh, and Japan, which has 1 qudrillion Yen in debt, promised to give the IMF $60 billion. So when Japan needs a bail out, we now know that Argentina will step up.
Full overnight data report from Bank of America:
Market action
Overnight, most Asian equity markets sold off for the second day in a row. Investors were worried about economic data that showed foreign direct investment into China fell for the fifth consecutive month. In addition, the region's investors are becoming increasingly nervous about Spain's borrowing costs, which broke through the 6% barrier yesterday.
Overall, the MSCI Asia Pacific Index declined 0.5%. The worst-performing regional market was the Shanghai Composite, which fell 1.0%. The Korean Kospi shed 0.4% and the Hang Seng dropped 0.2%. Japan's Nikkei lost 0.1%. On the flip side, the Indian Sensex is up 1.2%.
In Europe, equities are enjoying a solid rally, up 1.0% in the aggregate, after Spain held an auction for T-bills where demand was strong. The true test comes this Thursday, when Spain tries auctioning off longer-term debt. At home, futures are pointing to a strong opening. The S&P 500 is set to open 0.6% higher.
The dollar is weakening against a basket of other major currencies. The DXY index is down 0.1%. Commodity prices are higher, with WTI crude oil trading 80 cents higher, at $103.74 a barrel, and gold up $1.08 an ounce, to $1,652.90.
Overseas data wrap-up
In a sign that global trade momentum is slowing, non-oil domestic exports from Singapore were weaker than expected in March, tumbling 16.8% mom. That was below consensus expectations of a 4.3% contraction. From a year ago, Singapore's exports are down 4.3%.
Inflation in the UK remains above the central bank's target, at 3.5% yoy, in March. That is up 0.1pp from February's rate and above market expectations for a flat reading this month. Despite a slowing economy and high unemployment rate in the UK, which should bring down the inflation rate, inflation remains sticky. In the short term, rising oil prices and fiscal austerity measures that increase indirect taxes, such as the VAT rate, have boosted consumer prices. Longer term, these measures will sap growth and put downward pressure on consumer prices.
In the Euro area, the inflation rate rose to 2.7% yoy in the final March release, up from the 2.6% rate recorded in preliminary report. This marks the fourth consecutive month that headline inflation in the Euro area has remained at 2.7%. Normally, when an economy is plagued by high and rising unemployment and a weak economic outlook (the Euro area is expected to contract 0.5% this year), inflation drifts lower. However, in the near term, the recent run up in energy prices and increases in indirect taxes, such as the VAT rate, have countered the primary drivers of inflation, keeping the inflation rate sticky. Looking ahead, we believe that the main macroeconomic drivers of inflation should pull the inflation rate down to 1.8% by the fourth quarter of this year.
Unexpectedly, the ZEW indicator of investor confidence increased in April. The current situation index for Germany rose to 40.7 in April (up from March's 37.6). The market was looking for a decline to 35.0. Investor's expectations rose for the fifth consecutive month, to 23.4, above expectations of a decline to 19.0. In March, the expectations stood at 22.3. Investors are especially bullish about the prospects of the chemical industry (including pharma), electronics and machinery, and construction. There seems to be some disconnect between the latest releases of "hard data" (industrial production, orders received) and the investors expectations. Soft surveys, such as today's ZEW, are more upbeat, while the hard data points to weaker growth.
Today's events
At 8:30 am, we will be sorting through the March Housing Starts and Permits report. We look for housing starts to increase to 705,000 in March. Building permits were up in February, which should translate into more starts. At 9:15 am, we expect industrial production to expand 0.3% MoM in March after coming in flat in February, taking the capacity utilization rate to 78.5%.