Europe Unfixed Again

Slowly things in Europe are starting to go bump in the night again, with the EURUSD down some 150 pips from Friday's multi-year 1.37 high, Spanish bond yields spiking 20 bps to over 5.41%, back over the declining 50 DMA, Italian BTPs getting slammed up some 10 bps to 4.42%, as both Spanish and Italian stocks are sharply down on the day, by 1.2% and 1.9% respectively, following yet another Monte Paschi halt lower earlier in trading. The reason goalseeked by the media for today's weakness is signs of upcoming "political turmoil", namely the escalating Monte Paschi incident out of Italy, which we have been following closely, as well as the Spanish graft scandal, in which the ruling PP party and Mariano Rajoy have been implicated in massive kickbacks, and which may cost Rajoy his leadership at this pace. Of course, none of the data above is new, and neither is France's Moscivi repeating for the second time in a week that the EUR has risen far too high, and to call it catalytic is very naive, but it merely goes to show how the manipulated market decides when and if to actually follow the newsflow. As a result, US futures are pointing to a mildly lower opening, which however may reverse quickly once today's $2.75-$3.5 billion POMO kicks in. Of course, if the Italian political turmoil drags Draghi further into the mud, all bets are suddenly off about Europe being "fixed."

Key overnight headlines:

  • Spanish opposition calls on PM Rajoy to resign over corruption allegations
  • Spain’s Rajoy Fails to Quell Graft Criticism
  • China Jan non-mfg PMI up to 56.2 vs 56.1 prev, marks a 5-month high
  • Japan GPIF Mitani: to review asset allocation in April, 67% bond holdings "harsh" especially if Abe succeeds
  • Nikkei +0.62%, 10y Bund yield up 3bp at 1.70%
  • SPGBs, BTPs Plunge Amid Signs of Political Turmoil
  • Spain Registered Unemployment Rises Amid Deepening Slump
  • Merkel Cabinet to Pass Bank-Separation Plan: Handelsblatt
  • Cyprus at Odds With Pimco Report Method, Shiarly Tells RIK
  • Europe Investor Confidence Rises to 19-Mo. High, Sentix Says
  • Ireland ‘Coming Close’ to Anglo Irish Note Deal: Minister

Markets, via BBG:


  • Spanish 10Y yield up 19bps to 5.4%
  • Italian 10Y yield up 9bps to 4.42%
  • U.K. 10Y yield up 5bps to 2.15%
  • German 10Y yield up 1bp to 1.68%
  • Bund future down 0.06% to 141.93
  • BTP future down 0.68% to 111.81
  • EUR/USD down 0.51% to $1.3569
  • Dollar Index up 0.42% to 79.45
  • Sterling spot up 0.3% to $1.5732
  • 1Y euro cross currency basis swap little changed at -18bps
  • Stoxx 600 down 0.25% to 287.49


  • ECB Preview: Draghi May Sound More Dovish; Rate Cut Unlikely
    BoE Preview: Watch Incoming Governor Carney’s Treasury Address  
  • Short Semi-Core Debt on Periphery Risks in Feb., RBS Says
  • Enter Bund/ASW Widener; Target 40bps, Morgan Stanley Says
  • Target 400bps for Spain/Germany Spread, Commerzbank Says
  • ‘Risk-On Mode’ May End Soon as S&P 500 Overvalued: SocGen

Outlook, via SocGen

There will be little economic news this week, putting the central banks in the spotlight starting with the RBA tomorrow where a rate cut cannot totally be ruled out after weak employment and lower inflation data. There will be little to salvage for the AUD should they cut given the poor correlation with risk at present.

The Fed last week confirmed it would continue to purchase Treasuries at the current pace of USD85bn/month until sufficient improvement in the economy was achieved. The 7.8-7.9% rise in the unemployment rate last Friday underpinned this position, but as we saw from the price action on Friday, this may not stop the uptrend in longer duration UST yields ad swaps.

What about the ECB this week? No change is expected in interest rates: Mr Draghi shattered all hope of a rate cut last month, and confidence indicators have stopped deteriorating though the divergence within the euro area is not going away. However, the market will be waiting for the ECB president's comments on the first LTRO reimbursements: 305 banks have reimbursed EUR140bn, which is a good performance. Investors were no doubt too optimistic regarding a quick and massive withdrawal of liquidity by the ECB.

However, the tone has been set. This will undeniably support the EUR and EUR rates, but will comments on the currency slow the currency's ascent? Spanish politics are perhaps a good excuse to lock in profits.

Although risk appetite was mixed at the end of last week (reflected by the slight decline in rates), we still do not see any factor justifying a long-lasting turnaround. The EUR should remain in demand overall and EUR and US long rates are still skewed to the upside


No comments yet! Be the first to add yours.