SCOREBOARD: Bond breather

Lower European bond yields show recent central bank moves have taken the edge off investors' nerves.

Well-bid Spanish and French debt auctions seem to have calmed investors in the sovereign space somewhat and yields were down sharply for both of those countries as well as Italy. So the 10-year Italian yield was off 37bps to 6.65 per cent, the Spanish 10-year was off almost 50bps to 5.74 per cent, while the French 10-years were down 29bps to 3.38 per cent.

As for those auctions, Spain sold off €3.75 billion of 04/2015s, 01/2016s, and 01/2017s at yields between 5.187 per cent and 5.544 per cent, which is up sharply from past auctions (3.639-4.782 per cent) and at euro-era highs. Nevertheless, cover was good at around 2.7-2.8 for each auction and the yields are well down from the 7 per cent mark that markets have taken as a sign of severe distress. The French then sold off €4.35 billion of 5-year, 10-year, 15-year and 30-year bonds at yields of 2.42 per cent (down from 3.08 per cent last time), 3.18 per cent (from 3.22 per cent last time) and 3.65 per cent (3.77 per cent last month). The long bond sold off at a yield of 3.94 per cent (from 3.72 per cent) and in each auction cover was strong – 2.25-4.4 – with reportedly good demand from real money investors.

This is obviously a good sign that recent actions by central banks and even recent announcements on the EFSF have calmed nerves a touch and 3m EUR/USD basis came in again overnight settling at a midpoint of -112 from -129. In addition to that, there is a growing view that the December 9 summit could be a pivotal moment in the market and certainly policy makers are talking it up. Recall comments from the Polish finance minister yesterday that he expects "extremely forceful" action after the summit. Well, the new head of the ECB, Mario Draghi, didn’t seem to really contradict that expectation in a speech to the European parliament last night. He was a little bit vague and there is a lot left to interpretation, but he suggested in his speech that after steps were taken toward closer fiscal integration "other elements may follow”. He then added that the ECB’s job was to repair the monetary transmission channel and that the bond purchase plan was a means to do that – although at the same time he noted that bond interventions can only be limited. Whatever the case, many at least expect a follow up rate cut at the ECB’s meeting next week and it was interesting to note Draghi stating that the price stability target applied in both directions.

Despite the big decline in French, Italian and Spanish yields, European equities ended weaker overnight – the Dax was down 0.9 per cent, the CaC fell 0.8 per cent and the FTSE was 0.3 per cent lower, while the euro didn’t really do a lot (from 1630 AEDT time). The euro currently sits at 1.3472, or up about 12 pips or so on a big figure range. Moves elsewhere in the forex space are similarly small, with the Australian dollar little changed at 1.0237 on an 80 pips range. Sterling itself is largely unchanged at 1.5694 while Japanese yen is at 77.71.

On Wall Street, stocks closed slightly lower. They had a better session than their European counterparts on account of the fact that the ISM index rose to 52.7 ( 51.8 expected) in November, from 50.8 in the month prior in a good sign that manufacturing accelerated in that month. Orders were up sharply, as were shipments, though the employment index dipped slightly. So the S&P index lost 0.19 per cent ( 0.3 to -0.6 per cent range) to 1,245 with tech, consumer services and health care pushing higher but financials, telecoms and basic materials all weaker – the latter down as crude fell 0.3 per cent (WTI at $100) and -1.4 per cent on Brent ($108.95). Gold was off smalls at $1,743, copper fell 0.8 per cent and silver was 0.1 per cent higher. The Dow closed 26 points lower (12,020), the Nasdaq up 0.2 per cent (2,626) while Australia's SPI is up 0.2 per cent so far (4,244).

Finally, US Treasuries sold off a bit though moves were not big at all. On a 1-9bps range the 2-year yield was steady at 0.26 per cent, the 5-year yield rose almost 2bps to 0.97 per cent while the 10-year is up almost 5bps to 2.12 per cent. Aussie futures then sold off a bit – the 3s by 4 ticks so far to 96.7 and the 10s about 6 ticks to 95.9 (on a 10 tick range).

In other news and data, PMIs suggest manufacturing remains weak around the globe, with the UK PMI falling to 47.6 in November, from a revised 47.8. In Europe, the November manufacturing PMI was confirmed at 46.4 and this of course follows yesterday's data showing that the Chinese PMI was down to 49 from 50.4.

Looking at the day ahead, there isn’t much. All the excitement will be tonight when we get US payrolls for November. The market looks for a rise of about 125,000, while the unemployment rate is forecast to remain steady at 9 per cent.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.


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