21 March 2012 – “Mellow Yellow” (Donovan, 1966)

21 March 2012 – “Mellow Yellow” (Donovan, 1966)

Despite a US close on the European COB levels and a mildly Asian session, European risk opened on a positive note, even lifting China from its 4-week lows. Rebound mainly technical and in absence of news warranting further weakness to yesterday’s correction. Screen news that this was due to Greece’s parliament approving the bail-out are probably the most ridiculous explanation read so far, as nobody ever gave a thought to that of late. What does seem to spread, on the contrary, are expectations about a 3^rd bailout needed at some time (IMF, Eurogroup grumblings, PIMCO), as well as recurrent views about Portugal’s outlook, too. Still, that hasn’t been huge worrying factor lately either. Credit tighter. Bunds weak again. EUR tick firmer. Commodities about unchanged.

EFSF 5 YRS deal, pre-announced yesterday, done and dusted for EUR 4bn one hour after opening.

Talking of Portugal, numbers published showing that public deficit figures for the first 2 months tripled from a year ago on rising spending and weaker revenues, put a lid on the morning glory and markets drifted to more or less unchanged levels by noon with solely credit indices pushing tighter. Greece’s (central government) budget gap, on the contrary, has been shrinking by half, but the reliability of such stat has been subject to some tests over time. To round up deficit target discussions, one will not forget to mention that even some “sturdier” Core EZ+ members are faced with the issue and Netherlands is pitching its case to maintain a 4.6% deficit until 2013. Having gone soft on Spain’s pitch, it’s likely that some of it will be granted. But, the, who’s next?

Lower US mortgage applications were duly noted, but these are noisy figures. More on the weak side, but to be seen in relation with the rise in long end yields over the last week (30 YRS swaps moved out from 2.85% to 3.10% from 09 Mar to 16 Mar, hitting 3.20% early this week). As earlier housing data this week, existing home sales of 4.59m fell short of forecast (4.61m), but data for Jan was revised upwards (4.63m from 4.57m), so levelling out disappointment. Given that recurrent pattern, markets will soon start to zero in on the perception that the US economy might have front-loaded some of the good news during a mild winter and start to run out of steam.

Germany issued EUR 4.1bn at 0.31% with a BC of 1.8 (after 0.25% in Feb with same BC). Non event.

Good Portugal bill auction of EUR 0.4bn 4m 2.17% and EUR 1.6bn 12m at 3.65% (after 4.94% in Feb), but as well pretty much a non-event.. As for Spain, a tail of 9 cts tail does seem quite large for bills. But then again,  these are just EUR 2bn short term bills, after all.

Italy raising about EUR 5bn 4 YRS in a retail-targeted inflation linked exercise since the beginning of the week. Expects to do this once a quarter this year.

Another round of fresh supply with, next to the pre-announced EFSF EUR 4bn 5 YRS at MS +38, some servings of definitively riskier, riding out the credit outperformance to equities, coming from senior financials, Spanish covered bonds or lesser rated / unrated smaller corporates. ABN EUR 1.25bn 10 YRS MS +180; Erste Group EUR 500m 5 YRS MS+175; BPE Cédulas EUR 600m 5 YRS MS +255. Some more senior financials increases squeezing through the door, as well as Munich’ RE’s double-trancher 10 YRS nc 30 in sub for EUR 900 and GBP 450m at MS+395.

For corporates, after yesterday’s massive benchmark supply, some more targeted, domestic names as non-IG Fresenius or unrated Neste Oil.

ECB deposits added EUR 4bn to EUR 769bn (High EUR 827bn on 05 Mar).

VIX closed slightly higher at 15.6 in the US and back down to 15.0 tonight.

Oil back to 107.3 / 124.4 from 106.2 / 124.3 (from European COB) for WTI and Brent (unchanged). Gold unchanged at 1653. CRB up 0.4% mainly on metals.

Baltic Dry up 1.4% to 896. On straight recovery path since the 647 low print early Feb (+38%). Still far off the Dec 1930 high and 2011 high of 2173 in Oct.

10 YRS Yields: Germany 1.98% (-6); Swaps 2.38% (-4); Finland 2.36% (-6); Luxembourg 2.38% (-5); Netherlands 2.52% (-3); Austria 2.96% (-1); France 3.00% (-1); EFSF 3.14% (-7); Belgium 3.33% (+3); Italy 4.99% (+10); Spain 5.38% (+17).

10 YRS Spreads: Swaps 38bp (+2); Finland 38bp (0); Luxembourg 40bp (+1); Netherlands 54bp (+3); Austria 97bp (+5); France 101bp (+5); EFSF 115bp (-1); Belgium 134bp (+9); Italy 301bp (+16); Spain 340bp (+23).

EUR swap curve 2-5 YRS 55,6bp (-2,2); 5-10 YRS 71,8bp (unch) 10-30 YRS 25,9bp (+0,7) .

Bunds finally getting some uplift, as soon as equities turned back to flat / negative in early afternoon. Back with a vengeance during the afternoon, supported by UST and despite equities recovering to unchanged. Back through 2% mark.

Periphery weaker with especially Spain, as already pointed out several times lately, starting to drift away with some velocity. BTPs flirting back with the 5% mark, since breaking through pots-LTRO.

Spanish 10 YRS yields have bottomed out around 4.75%, respectively 4.78% early Feb and Mar with an intermediary high of 5.41% mid Feb, which has been a recurrent support / ceiling. Looking further in time, ever since the break-out in Spanish yields end of 2010, 10 YRS have mainly traded in a rough 4.75-5.50% range with notable rises to 6.30% in Summer last year and the 6.66% (Come on!) spike in Dec 2011. So, in retrospective…

Credit close uneven with Main about unchanged, but Financials snapping markedly wider. Good for those who raised senior funding this week.

Electrical banana / Is bound to be the very next phase.

Tomorrow: Sovereign supply done for the week. ECB and Draghi conference (rate outlook, pulling the plug on liquidity support, rampant Target 2 imbalance questions and how to juggle divergent France / Germany and rest of EZ price pressures).

Data on China Mar PMI (was 49.6 in Feb). EC Composite (49.6 fcst after 49.3) and Industrial orders (-3.1% YoY fcst, after -1.7%). EZ Consumer confidence of -19.8 fcst after -20.3 German and French PMI with respective forecasts of 51.0 after 50.2 and 50.2 after 50.0.

US jobless claims 350k fcst after 351k. Leading indicators 0.6% fcst after 0.4%

Rest of week:

France Biz confidence fcst 93 (after 92). Italy Retail sales fcst -3.4% YoY (after -3.7%). US New Home sales fcst 325k (after 321)

Click link on title or below for today’s musical support:

http://www.youtube.com/watch?v=JsPvigSTeD0