Key news - Italian bond yields back below 7%, but only because of heavy ECB buying.
- Standard and Poor’s mistakenly announce that France has been downgraded fuelling concerns about France. 10y Spread to Germany widens to new euro-era high.
- Papademos elected to lead the Greek unity government. Former EU Commissioner Monti favourite to lead unity government in Italy. Both are preferred candidates by financial markets.
Markets Overnight
Financial markets were calmer yesterday after a hectic day on Wednesday that pushed Italian yields well over 7%. The ECB returned to the market, aggressively bought Italian and other Southern European bonds and managed to push Italian yields back below 7%. Italian 2y yields fell 70bp to 6.31% after the 1y t-bill auction was well received in the market. The EUR 5bn t-bills were sold at an average yield of 6.087%, up from 3.570% last month, but still better than feared ahead of the auction.
Perhaps the ECB should have bought French bonds also. Yesterday French 10y government yields rose to a new euro-era high against Germany, widening 21bp. The sell-off accelerated as rumours started to spread that France had lost it triple A rating. It turned out Standard and Poor’s mistakenly had announced to some clients that France had been downgraded. The rating agency later in the day had to deny the downgrade and confirmed the triple A rating and stable outlook for France. However, as there is often no smoke without a fire, the mistake sparked renewed concern about France and its fragile banking sector. France closed trading 167bp above Germany underlining that in the eyes of the market France does not deserve its triple A rating. Not only do European policymakers have to deal with amateurish rating agencies, but also the sell-off in peripheral debt this week has made it difficult to increase the firepower of the EUR440bn EFSF fund to the 1 trillion that EU leaders planned just two weeks ago. According to the head of EFSF, Klaus Regling, the heightened investor skittishness means that guarantees would now have to be bigger to satisfy investors.
But it was not all doom and gloom yesterday. US equities actually ended the day approximately 1% higher. Jobless claims dropped to the lowest level in seven months indicating that the US labour market is actually improving. The appointment of former ECB vice president Papademos to lead the Greek unity government also helped to calm nervousness. Papademos – the preferred candidate in financial markets - will be sworn in today at 2 pm. According to the Wall Street Journal a consensus is also forming in Italy that former EU Commissioner Mario Monti will lead a unity government in Italy when the debt reduction measures have been agreed on today and tomorrow. Monti in charge in Italy should also help calm market nervousness.
In the FX market EUR/USD has gained somewhat after the strong drop on Wednesday and USD/JPY has slipped to the lowest level since BoJ intervened end October.
Global Daily
Key focus continues to be on Italy where markets are watching closely the vote on the debt reduction measures in the Senate today. The chamber of deputies will give final approval tomorrow and Berlusconi will resign after that. A new unity government is then supposed to be formed led by Mario Monti, which should help restore some calm. On the data front it is very limited today. US consumer confidence from Uni. of Michigan for November is the main interest.
Fixed income markets: No auctions and limited data releases today. Instead focus will continue to be on Italy and especially Italian bond yields. Yesterday spreads narrowed as the ECB appeared to have stepped up its efforts in the secondary markets. However, judging from the recent pattern we see a good chance that the ECB will allow the spreads to widen again - ahead of the weekend - just to put more pressure on the austerity vote on Sunday. Going into next week we think that the performance of Italian bonds will be positively correlated with the austerity achievements accomplished over the weekend - although it will take significant action from the ECB to tighten those spreads.
In the FX market EUR/USD rebounded slightly yesterday as Italian yields fell somewhat. However, we believe that the euro could easily come under renewed pressure the next couple of weeks. The European debt crisis has no doubt moved into a new critical phase and sentiment is definitely against the euro. The market can still price in more rate cuts from the ECB and speculation about quantitative easing from the ECB could emerge. There is also a risk that real money flows could become euro negative. Commercial USD-buyers might start to revise their hedging ratio significantly higher and rebalancing flows and lower hedging ratio for e.g. US assets from the European pension funds will also tend to push EUR/USD lower.
Scandi Daily
Denmark: We note that EUR/DKK has once again moved lower trading at 7.4420 despite the 35bp cut from the Danish central bank last week. We are approaching the level in EUR/DKK where the central bank intervened in the market ahead of the rate cut on 3 November. The strong DKK reflects in our opinion that both foreign and domestic investors are favouring Danish papers in the midst of the current financial turmoil, not least as the EUR/DKK FX forwards in fact trade with a discount even on shorter maturities. In our views a new independent Danish rate cut in the Certificates of Deposit rate of 10bp has moved closer. Hence, we could very well see an extra 10bp rate cut from the Danish central bank, when the ECB is expected to lower the refi-rate by 25bp on 8 December. But remember, we should still expect some FX intervention by the central bank and a slightly lower EUR/DKK level is also a possibility before we will see a new Danish independent rate cut.
Sweden and Norway: Nothing on the agenda.
- Italian bond yields back below 7%, but only because of heavy ECB buying.
- Standard and Poor’s mistakenly announce that France has been downgraded fuelling concerns about France. 10y Spread to Germany widens to new euro-era high.
- Papademos elected to lead the Greek unity government. Former EU Commissioner Monti favourite to lead unity government in Italy. Both are preferred candidates by financial markets.
Markets Overnight
Financial markets were calmer yesterday after a hectic day on Wednesday that pushed Italian yields well over 7%. The ECB returned to the market, aggressively bought Italian and other Southern European bonds and managed to push Italian yields back below 7%. Italian 2y yields fell 70bp to 6.31% after the 1y t-bill auction was well received in the market. The EUR 5bn t-bills were sold at an average yield of 6.087%, up from 3.570% last month, but still better than feared ahead of the auction.Perhaps the ECB should have bought French bonds also. Yesterday French 10y government yields rose to a new euro-era high against Germany, widening 21bp. The sell-off accelerated as rumours started to spread that France had lost it triple A rating. It turned out Standard and Poor’s mistakenly had announced to some clients that France had been downgraded. The rating agency later in the day had to deny the downgrade and confirmed the triple A rating and stable outlook for France. However, as there is often no smoke without a fire, the mistake sparked renewed concern about France and its fragile banking sector. France closed trading 167bp above Germany underlining that in the eyes of the market France does not deserve its triple A rating. Not only do European policymakers have to deal with amateurish rating agencies, but also the sell-off in peripheral debt this week has made it difficult to increase the firepower of the EUR440bn EFSF fund to the 1 trillion that EU leaders planned just two weeks ago. According to the head of EFSF, Klaus Regling, the heightened investor skittishness means that guarantees would now have to be bigger to satisfy investors.
But it was not all doom and gloom yesterday. US equities actually ended the day approximately 1% higher. Jobless claims dropped to the lowest level in seven months indicating that the US labour market is actually improving. The appointment of former ECB vice president Papademos to lead the Greek unity government also helped to calm nervousness. Papademos – the preferred candidate in financial markets - will be sworn in today at 2 pm. According to the Wall Street Journal a consensus is also forming in Italy that former EU Commissioner Mario Monti will lead a unity government in Italy when the debt reduction measures have been agreed on today and tomorrow. Monti in charge in Italy should also help calm market nervousness.
In the FX market EUR/USD has gained somewhat after the strong drop on Wednesday and USD/JPY has slipped to the lowest level since BoJ intervened end October.
Global Daily
Key focus continues to be on Italy where markets are watching closely the vote on the debt reduction measures in the Senate today. The chamber of deputies will give final approval tomorrow and Berlusconi will resign after that. A new unity government is then supposed to be formed led by Mario Monti, which should help restore some calm. On the data front it is very limited today. US consumer confidence from Uni. of Michigan for November is the main interest.Fixed income markets: No auctions and limited data releases today. Instead focus will continue to be on Italy and especially Italian bond yields. Yesterday spreads narrowed as the ECB appeared to have stepped up its efforts in the secondary markets. However, judging from the recent pattern we see a good chance that the ECB will allow the spreads to widen again - ahead of the weekend - just to put more pressure on the austerity vote on Sunday. Going into next week we think that the performance of Italian bonds will be positively correlated with the austerity achievements accomplished over the weekend - although it will take significant action from the ECB to tighten those spreads.
In the FX market EUR/USD rebounded slightly yesterday as Italian yields fell somewhat. However, we believe that the euro could easily come under renewed pressure the next couple of weeks. The European debt crisis has no doubt moved into a new critical phase and sentiment is definitely against the euro. The market can still price in more rate cuts from the ECB and speculation about quantitative easing from the ECB could emerge. There is also a risk that real money flows could become euro negative. Commercial USD-buyers might start to revise their hedging ratio significantly higher and rebalancing flows and lower hedging ratio for e.g. US assets from the European pension funds will also tend to push EUR/USD lower.
Scandi Daily
Denmark: We note that EUR/DKK has once again moved lower trading at 7.4420 despite the 35bp cut from the Danish central bank last week. We are approaching the level in EUR/DKK where the central bank intervened in the market ahead of the rate cut on 3 November. The strong DKK reflects in our opinion that both foreign and domestic investors are favouring Danish papers in the midst of the current financial turmoil, not least as the EUR/DKK FX forwards in fact trade with a discount even on shorter maturities. In our views a new independent Danish rate cut in the Certificates of Deposit rate of 10bp has moved closer. Hence, we could very well see an extra 10bp rate cut from the Danish central bank, when the ECB is expected to lower the refi-rate by 25bp on 8 December. But remember, we should still expect some FX intervention by the central bank and a slightly lower EUR/DKK level is also a possibility before we will see a new Danish independent rate cut.Sweden and Norway: Nothing on the agenda.
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