19 January 2012 – “I Want to Take You Higher” (Sly & the Family Stone, 1969)

19 January 2012 –  “I Want to Take You Higher” (Sly & the Family Stone, 1969)

Markets opened in line with the (for this week) accustomed positive undertone of better US close (See the relieved uptick on graphs every night, once the hysterical continent has finally closed books, and US players indulge in their decoupling) and good Asian overnight performance. EUR steadily grinding up 20 pips every hour and smoothly sailing from 1.2750 to past 1.29 at lunchtime. Healthy equities, good credit with bank risk perception still steadily melting and on the back of satisfying sovereign auctions. Better than expected earnings at the US morning added to the upside pressure with European stocks up 1.6%, Main down 6 (3.7%) and Financials down 16 ticks (6.5%) before US figures (Jobs slightly better, but with revised prior reading over 400k; housing still bad), which were a bit of a mood downer, as were Phily FED figures. Still, the European mood seems to have definitively optimistic and markets closed on their highs. Or is it that too many shorts are being squeezed out, for lack of really bad real news?

Baltic Dry still tanking (Jan 2009 levels now)

The slightly dreaded Spanish auction went about fine with higher bid-to-cover ratios (B/C) and especially EUR 3bn sold in 10s at 5.40%. Then again, the Tesoro couldn’t resist over-allotting once more its dealers, selling over EUR 6.6bn against an announced auction of up to EUR 4.5bn. While the marketing value of the message “We sold more than intended, because of that high demand” is certainly not to be underestimated, it might fade out over time, especially if dealers get hit in full every time, even at low prices (There’s a 54 cts / 6bp tail, the difference between the average and lowest allotted price, on the 2022). Likewise, the day they’ll remain just in bounds of the announced amount, everyone will suddenly scream panic. Bah… Bueno... (Speaking of Spanish risk:  seeing yesterday’s ICO EUR 2bn placed for over 90% domestically is a kind of downer. Seems like mainly Spanish banks are carrying the flame here, while foreign perception is not yet up to the task…)

One more auction done. France issued EUR 8bn on a EUR 6.5 to 8bn announced auction in 2 to 4 YRS BTANs at good BCs with 3s and 4s at 1.51%, respectively 1.89, both 90 bp below the November auction. Downgrade digested.

Final action on the sovereign front was Austria’s 2-tranche syndication in 10 and 50 years, which saw a somewhat muted reaction in 10s (judged by the EUR 3bn printed with smaller and slower book than Tuesday’s Belgium deal), but with an impressive EUR 2bn print in 50s (see comments below). 50 YRS certainly a courageous trade, unseen since 2005 in EUR, but probably more technical than a pure signal of renewed market confidence. Was definitively worth the gamble. Applaus!

Finally, ECB deposits have come down, and this substantially, as we went from yesterday’s record EUR 528bn to a “mere” EUR 395bn, knowing that yesterday was the start of the reserve maintenance period (until Valentine’s Day, as it is). Bear in mind that there’s a strong element of “seasonality” with the ECB deposits (low at start, high at end of the period). So while the drop is impressive, it doesn’t even take us down to the former high of June 2010 at EUR 369bn. The last period ending 12 Dec 2011 saw deposits falling from EUR 346bn to 140bn to then steadily build up until the end of the period.

Huge drop in financial risk to +227 (-22 or 9%). We traded 358 mid November, down to 260 early December, back to 330 mid December, 270 end December, 295 on 09 Jan. Quite an improvement.

Spreads to Germany by and large stable throughout the day and tighter into the close: Netherlands +29 (-1), Finland +34 (unch), 10 YRS swaps (aka swap spread) +48 (unch), Austria +128 (+3), France +128 (-7), Belgium +236 (-14) [on new reference], Spain+335 (-2) and Italy +451 (-11). This is good, but somehow doesn’t reflect the other asset classes performance, which in turn are driven by the feeling that EZ tensions are fading. Odd.

Primary –wise: Once more, rather a sovereign and agencies day. Covereds on hold in EUR. Surprisingly, no real attempts yet of EZ banks to push for senior debt. Seeing US names lining up domestically after publishing their Q4 earnings. Corporates likewise sidelined for choice.

As for tomorrow, in absence of party spoiler, the squeeze could continue. Still, beware of last minute Greek news or unexpected rating actions or rumours.