26 January 2012 – “Benny and The Jets” (Elton John, 1974)

26 January 2012 – “Benny and The Jets” (Elton John, 1974)

The long-term FED outlook of LOW (rates, inflation, growth) until end 2014 has triggered once more QE3 hopes and in any case pushed the USD down, as well as moderately boosting US stocks in the close. Not sure such that outlook can be fundamentally supportive for risk appetite per se, but any news that risk assets could find a generous sponsor is a good short term boost nowadays. While the FED remains in search of a reliable employment indicator, last night’s comments tend to underline that the US will remain a long shot of historic figures for a while. But, bah, if the FED picks up the tab, so be it. Thanks, Ben. Light “risk on” at European open with stocks matching NY close with ½-1% firmer start and strongly tighter credit indices (-6 / -15 / -12 on Main, Financials and SovX). US figures uneven with good durables and bad jobless added a further ½% to the upside, then capped by disappointing leading indicators and yet once more home sales. We might enter a phase of counter-intuitive market behaviour: the worse the figures, the earlier Q3 is getting on its way. Ben, to the rescue: Start buying, please!

Oddly enough, the whole RISK ON of today has come with falling EZ yields, be they on German Bunds or most other European sovereigns tightening, especially Spain and Belgium, later Italy. Markets further comforted by a positive EUR 5bn 2 YRS Italian zero-coupon and ILB auction (normally slightly less scrutinized, as very specific underlying markets). Italy doing great today with 10 YRS finally hitting 6%, back to mid October 2010 levels (and coming from 7.50% in November). While still high as such, it does take away some of the anguish of Italy stuck with too high refinancing costs.

Portugal and Greece remain the main party spoilers. The all so elusive PSI remains “close” to be clinched. Whether the ECB will be asked to bite the bullet, and its main shareholders agree to it, remains open at this stage. August 2013 Greek bonds (2 YRS benchmark) under 20% in price & over 200% in yield.

This leaves plenty of time to delve on Portugal’s situation, where despite ECB buying yields are past the 15% mark on the 2s and 10s and flirting with 20% in the medium part of the curve. The Portuguese bond curve now quotes 50% on anything longer than 5 YRS. CDS curve peaking at 2 YRS (around 20%).

A belated thought on yesterday’s Irish deal: Good opportunity for Irish debt holder to fully profit from the LTRO, too! Should have thought about it right away… As for Q1, 2 or 3 in the US, financials are taking comfort from anything allowing a good sponsored carry trade.

ECB deposits tick lower at EUR 484bn. Baltic Dry down the by now usual 4% to 753. Ok, just another 12% down to the 663 low of December 2008. Before that the level was only briefly broken in summer of 1986 (Yeah, that’s a while ago…).

Spreads to Germany initially all tighter, but finally Core outpaced by Bunds and the periphery: Netherlands +32 (+4), Finland+42 (+3), 10 YRS swaps +49 (+1), France +122 (+3), Austria +140 (-2), Belgium +193 (-7) , Spain+331 (-11) and Italy +416 (-9).

New issue activity profiting from firmer tone with finally some sizeable senior financial offerings (although both non-EZ), as well as French corporates back on the menu and even a Finnish nuclear power plant operator. EIB still printing on a quasi daily basis (EUR, GBP, USD, CHF, Nordics, non-core $), over EUR 15bn YTD in 2 dozen deals on a EUR 60bn overall 2012 funding target.

Markets seem awfully lofty here with the main impulse of the day the sole hope of future FED largesse.