Europe Debt Crisis Remains Front And Center

Another day and another stretch of European debt spine on the torture rack. Merkel rhetoric still points to continued desire for solution via discipline rather than money printing. The situation remains tenuous.

Today’s French and Spanish bond auctions saw poor demand and much higher yields once again, despite the ECB’s presence. Yield spreads on French and Spanish debt vs. German counterparts stretched wider once again, though by the time of this writing, French 10-year bonds were trading at yields below the close of the last couple of days after the yield briefly exceeded 200 basis points to Germany for the first time ever.

Merkel backed up the German position against using the ECB as the lender of last resort in a speech in Berlin today, and also ruled out the idea of Euro Bonds to dig the Euro Zone out of its debt crisis. Instead, she insisted that an EU treaty change to allow more direct control of national budgets be enacted – possibly at the Dec. 9 EU summit. (This kind of cession of a degree of sovereignty was circulating yesterday and might conceivably be the trigger for German acceptance of a more prominent role for the ECB – but would nations want to surrender sovereignty to a central authority? The hopes for ECB intervention along this line of logic may be one reason behind the bounce in risk and the Euro today, though it curiously unfolded as Daube, head of Germany’s debt agency said that the ECB could force countries out of the Euro by refusing to accept their debt as collateral.)

Merkel also asked that the EFSF rescue plan details be completed. One thing is certain – time is fast running out for action at the rate things are going. Perhaps the ECB can step up its efforts for a matter of days or a week or two to keep a lid on things, but we’re in the zone here for dramatic action of some kind to stop this from going all-out systemic due to risk of a hard default.

Odds and ends:

UK Retail Sales were much better than expected, but it seems that GBP trades a bit passively on risk appetite, weakening a bit later in the day as the Euro rebounded, bonds sold off and equities tried to stage a comeback.

Reverse US decoupling? While Euro Zone data is showing very marked weakness, we get yet another day with positive vibes out of the US, as weekly jobless claims notched their lowest level since April and the Housing Starts number was solid (a bit less so considering negative revision to Sep. data) and the Building Permits number registered a massive jump in October to an annualized 653k, the highest since early. While a housing boom is hardly around the corner in the US, it is increasingly clear that much of the air has been let out of the bubble.

Not to be ignored in all of the fuss today was the absolutely massive drop in Sweden’s Average House prices in October, a drop of about 8% in a single month. Though it is a relatively volatile index, we have long been looking for more concrete signs of an unwind of the Swedish housing bubble and a negative trend is really beginning to show with this last data point. The build up toward this unwind has been evident for some time, as inventory to sales ratios have been terrible, but this is the first very hard evidence that it is finally having an effect on price. This and a weak Euro Zone economy could put quite the pinch on the Swedish economy and banking system going forward. USDSEK upside is an interesting idea in the months ahead if we are to use relative housing market phases as an input. On that note – watch the 7.00 level. 

Looking ahead
This market remains very much ad hoc due to the strains in Europe, where bond spreads remain very wide, basis swaps show extreme strain, etc. The next focus, assuming we get through tomorrow without a further acceleration of the strain, will be Sunday’s Spanish election, where it is very clear that the PP candidate Rajoy will win the election, the only question being how large his mandate will be and what reforms he is able to ram through the system.

On the economic calendar, look out for the US Philly Fed up shortly, the only US data point left this week that can possibly spoil the strong data party.

Stay very careful out there.

Economic Data Highlights

    * UK Oct. Nationwide Consumer Confidence out at 36 vs. 43 expected and 45 in Sep.
    * Sweden Oct. Average House Prices out at 1.822M vs. 1.98M in Sep.
    * UK Oct. Retail Sales ex Auto Fuel rose +0.6% MoM and + 0.9% YoY vs. -0.3%/-0.2% expected, respectively and vs. +0.3% YoY in Sep.
    * Euro Zone Sep. Construction Output out at -1.3% MoM and +0.4% YoY vs. +1.9% YoY in Aug.
    * Switzerland Nov. Credit Suisse ZEW Survey out at -64.3 vs. -54.4 in Oct.
    * Canada Sep. International Securities Transactions out at 7.35B vs. 4.0B expected and 8.22B in Aug.
    * US Oct. Housing Starts out at 628k vs. 610k expected and 630k in Sep.
    * US Oct. Building Permits out at 653k vs. 603k expected and 589k in Sep.
    * US Weekly Initial Jobless Claims out at 388k vs. 395k expected and 393k last week
    * US Weekly Continuing Claims out at 3608k vs. 3635k expected and 3665k last week
    * US Weekly Bloomberg Consumer Comfort survey out at -50 vs. -50.4 expected and vs. -51.6 last week