In a very quiet session there was one notable macro update, and this was the German ZEW Economic Sentiment survey, which after months in negative territory, surprised to the upside in December, printing at 6.9, on expectations of a -11.5 number, and up from -15.7. This was the first positive print since May, and in stark contrast with the dramatic cut of German GDP prospects by the Bundesbank from last Friday, which saw 2013 GDP slashed by 75% from 1.6 to 0.4%. In fact, moments after the ZEW report, which is mostly driven by market-sentiment, in which regard a soaring DAX has been quite helpful, the German RWI Institute cut German 2012 and 2013 GDP forecasts from 0.8% to 0.7% and from 1% to 0.3%. In other words, any "confidence" will have to keep coming on the back of the market, and not the economy, which is set to slow down even further in the coming year. But for a market which will goalseek any and all data to suit the narrative (recall the huge miss in US Michigan consumer confidence which lead to a market rise), this datapoint will undoubtedly serve as merely another reinforecement that all is well, when nothing could be further from reality. Also, since we live in interesting "Baffle with BS" times, expect the far more important IFO index to diverge once again with its leading ZEW indicator (as it did in November) - after all everyone must be constantly confused and live headline to positive headline.
The spillover effect from the ZEW result has sent peripheral Spanish and Italian bonds several bps tighter on the session, even as the fundamental newsflow continues to disappoint and the region of Catalonia informing the government it will miss its 2012 deficit target, forecasting a 2.5% deficit, or far greater than before. That said, we expect a material miss by Spain itself, which like last year around this time, is set to disclose what its real budget deficit miss will be. Finally, Italian business lobby Confindustria has revised 2013 GDP from -0.6% to -1.1%, while seeing 2013 debt/GDP rise to 126.7% from 126.0%.
The revised Greek debt buyback deadline is set to pass in minutes at 7:00am Eastern, and following another round of optimism from Greece, not to be confused with that from last Friday, it is expected that the required €30 billion in consents will be accounted for.
All this is enough to send the EURUSD soaring to 1.3000, and the equity futures complex well into the green, just as intended.
A quick take on the German ZEW from SocGen:
Yesterday, French and Italian industrial production data pointed to a slowdown in both countries. What will the German ZEW index reveal today? The ZEW index has often been a leading indicator for the IFO. However, in November the indices moved in opposite directions: the ZEW (German financial analyst survey) turned down while the IFO (business leader survey) turned up for the first time in seven months. Did the Eurostoxx50 upturn (+7% in the second half of November) boost German analysts' optimism? This would be good news, particularly as the outcome of the next ECB meeting (on 12 January) is likely to greatly depend on economic data published between now and then, particularly in the core countries. Nevertheless, one swallow does not a summer make: these indices must post increases at least three months in a row to signal a turnaround in the trend.
We will also be looking at the Spanish bill auctions as the 3Y and 7Y Bonos issues saw their bid to coverage ratio drop last week. The Greek bill auction will take place in the light of the debt buyback programme that was prolonged by one day yesterday. The risk is that the short end of these issues could be hurt by the uncertain global backdrop (uncertainty in Italian politics).
On the other side of the Atlantic, the US trade deficit is not expected to impact the markets: all eyes will be on the Fed meeting tomorrow.
Finally, the more comprehensive recap from DB's Jim Reid:
Political developments will continue to drive proceedings in the short term. Markets yesterday managed to largely shrug off the latest political developments in Italy with the S&P 500 avoiding a down day (+0.03%). Across the Atlantic, the Stoxx600 managed a 0.75% late-day rally to close 0.14% higher but this masked the underperformance in peripheral markets. Indeed we saw a - 2.2% and -0.56% fall in Italian and Spanish equities respectively. Italian bonds also underperformed yesterday with the 10yr yield selling off 29bp in its worst one day performance since 2 August. It will be interesting to watch the market’s demand for the next Italian bond auction on Thursday when Italy hopes to issue around EUR4.25bn.
Markets will likely be encouraged by reports overnight that Monti is considering being involved in the elections. According to the FT, Monti is in talks with centrist groups to stand as a PM candidate. The article says that Monti is expected to give his answer on whether he will run within a week. The leader of the centre-left Democratic Party, Bersani, was also quoted as saying he would like Monti to stay on in some capacity, possibly as President.
In the US, the WSJ published a report late last night suggesting that negotiations between Boehner and Obama have taken “a positive turn”. However exactly what has changed is unclear as both Boehner and Obama have chosen to keep details of their Sunday conversation private. The article says that talks “have progressed steadily in recent days” but both sides have decided to maintain a “strict public moratorium on commenting on the talks”. DB's man in Washington, Frank Kelly will be hosting a conference call today providing an update on the fiscal cliff at 1:30pm UK time. Details are provided at the bottom of today's EMR for those who are interested.
Asian equities are a little mixed overnight with little economic data to drive markets in either direction. Gains are being paced by the Hang Seng (+0.1%), ASX200 (+0.4%) and the KOSPI (+0.3%). The Shanghai Composite (-0.5%) is underperforming following the release of loan data for November which showed that the country’s banks made new loans of RMB523bn (vs RMB550bn expected). In addition, domestic media are reporting that Chinese regulators may set next year’s new loan quota at RMB 8tn for banks (unchanged from this year) which is erasing some hopes of an easing in administrative controls on lending following the recent leadership handover (China Securities Journal). The Nikkei is also underperforming (-0.17%) weighed by the utilities sector on reports that a number of nuclear power plants that lie near fault lines will have tobe decommissioned (Bloomberg).
In other markets, the Asian and Australian credit indices are flat to unchanged, while the AUD (1.0480) and Japanese Yen (82.34) are steady against the greenback. In other interesting headlines, the FT reports that sales of gold coins at the US Mint have hit their highest level in more than two years with sales rising sharply “within a day or two” after the recent presidential election. The Royal Canadian Mint also reported their strongest sales this year in November.
Turning to the day ahead, it will be a relatively light day for data with Germany’s ZEW survey and the UK’s RICS housing data being the main prints in Europe. Greece is expected to announce the results of its extended buyback today. Eurozone finance ministers will hold a conference call shortly after to discuss the outcome of the buyback, ahead of the council’s meeting on Thursday. In the US, the focus will be on October’s international trade report and wholesale inventories data.