13 January 2012 – “Don’t let me down” (The Beatles, 1969)

13 January 2012 – “Don’t let me down” (The Beatles, 1969)

The day started as mildly conclusive and positive end to a positive week. Italy raised what was needed to reassure the markets, although the low B/C would point to a certain lack of enthusiasm to load up 3 YRS BTPs at the low point of the last weeks (7.75% early December, 5.92% on 09 Jan, and then 4.83% at the auction). Whatever… EUR 4.75bn lifted. Basta! Still, after yesterday’s Spanish feast, the bar was set high and markets were not able to get a more positive spin out of it and trailed sideways until the mood finally soured again on downgrade rumours (Yes, those again...) and stalled Greek PSI talks (Yes, again…). Seems the rumour will be confirmed this time. End of week depressed, but not hysterically.

ECB deposits back up to just shy of EUR 500bn, a new record high. Despite Draghi assertions yesterday about the first LTRO of EUR 489bn dripping into the economy, one will note that both figures do match. Rising Spanish bank ECB borrowing figures were not really what the market wanted to see, either, pushing out spreads in Spanish bonds after the late bonanza already in the morning, even before the downgrade rumours hit the street. Baltic Dry shipping index still in free fall. Bund futures on 4 successive new all-time highs. 10 YRS IRS new all-time low. Credit whiplashed (Main -6 to +3, Financials -12 to +10, Sovereigns -10 to +11).

For a while markets had been approaching Nirvana: Everyone could be happy, as equities were up, credit indices lower, yields lower for everyone. EUR was softer before rumour time, but had bounced to 1.2880 in late Asian trading, which was a little over the top. Then down to 1.27 and through at rumour time to hit 1.2650 support.

All spreads to Germany initially a little tighter, with the exception of Spain loosing ground in the morning already, and then of course into full reverse gear: Netherlands +33, Finland +39, Austria +130 (+14), France +132(+12), Belgium +239 (+17), Spain +345 (+16) and Italy +486 (+6).

Nothing crispy on offer today, however this week was really nice week for primary markets: Covered bonds, totalling EUR 9.6bn in 9 deals, ranging from EUR 500m to EUR 2.25bn in 4 to 10 YRS, saw the light. Jurisdictions were restricted toAustralia, France/ Germany/ Netherlands for the EZ, plus Nordics, Switzerland (next to last week’s English supply) for non-EZ issuers. The big question remains though the market access of Italian and Spanish banks. While this week’s auctions were seen as test, one would probably expect Spanish agencies to dip a toe in the water first (ICO, FADE or FROB). The fact that the senior debt market is rising from its ashes is encouraging, although one would note that non-EZ banks are the ones issuing most and best in EUR.

Talking of agencies, here as well the week was good with EIB’s EUR 5bn 3s, KfW’s EUR 4bn 10s, FMS’ EUR 3bn 3s, next to recurrent German sub-sovereigns and good USD traffic via ADB or AfDB. USD domestics were good to EM / LATAM names. Corporates good for EUR 7bn+ in EUR, as well: One more car maker (VW), as last week; a lot of French again, as in December (APRR, Carrefour, Valeo, Vivendi) and with Repsol a Southern European corporate testing reception. Need to digest supply and rating news. Don’t expect too early action on Monday (next to the US being closed). Maybe someone will stick out his neck by Tuesday. German Länder or agencies always welcome.

Overall, a very good “risk on week”, while it lasted, despite the close. Some of the gains seemed certainly overdone and while sovereign supply went down well at very much improved levels, it will need to be digested against a background of rating downgrades, if and when confirmed. A lot is already priced in anyway with Austria and France trading well over 100 to Bunds for a while, and as the US show, you can live without, but the question is now whether markets will settle with it as a matter of fact or whether it will spiral lower on further lower outlook. In the meantime, we’ll not the softer, although rather tame close.