SCOREBOARD: Dollar dampener

An auction of Italian bonds once again scared investors, and the pain quickly spread to the Australian dollar.

The Australian dollar and the euro continued to weaken overnight, with the former the biggest loser as it dropped a big figure and slipped under parity, to sit at 0.9911. The euro was off only about 30 pips to be at 1.2998, but it was only a week or so ago that it sat proudly at 1.34 and above.

Europe, needless to say, is the drag. But specifically for last night, punters were spooked by an Italian 2016 bond tender where €3 billion was sold at a yield of 6.47 per cent, which is up from 6.29 per cent in November and represents a euro-era high. Even so, cover was worse at 1.42, from 1.47 last time. On the positive side, this looks like a clean auction and there were no reports of ECB involvement either before or after the auction. In fact there may not be a lot more of that if commentary from both German Chancellor Angela Merkel and the Bundesbank are anything to go by. Merkel reiterated last night that the solution to the European crisis will take years and there is no one single blow that will solve things (a contrast to French and Irish politicians who are calling for the ECB to print).

Then the Bundesbank head also reiterated his opposition to the SMP and bond-buying, stating that, "it is like an alcoholic saying that I need to get a bottle tonight…starting tomorrow I will be clean…but I need the bottle tonight. I don’t think it is sensible to give the alcoholic the bottle.” He went on to note that even supporters of the bond-buying program on the ECB council were becoming increasingly sceptical, and pointed out that Italy could live for years with high interest rates without having serious problems (average maturity is 7 years apparently). In the secondary market then, Italian 2-year yields spiked 40bps to 6.06 per cent, while the 10-year was up 11bps to 6.79 per cent. Spanish bond yields conversely fell, by 10 bps and 2bps on the 2-year (4.07 per cent) and 10-year (5.68 per cent), but otherwise other market stress indicators deteriorated as US swaps spreads pushed higher and EUR/USD basis was hammered.

I suspect it was the combination of a stronger US dollar and commentary from Germany that saw commodities smashed last night. We’re talking some fairly sizeable moves here with WTI off 5.3 per cent ($94.9) and Brent down 4.4 per cent ($104.7). These kind of moves were across the board though and in the metals space, gold was off over $70 to sit at $1,567 which is the lowest since late September – or July, on a sustained basis. Silver was then belted, down over 8 per cent and Dr Copper was off 4.6 per cent.

As for equities, they were obviously weaker, and at the close on Wall Street, the S&P 500 had lost 1.1 per cent (1,212) with energy, technology and industrials the hardest hit, although all sectors were weaker. The Dow for its part lost 131 points (11,823), the Nasdaq gave up 1.6 per cent (2,539) and Australia’s SPI is 0.8 per cent weaker (4,146). European stocks underperformed those figures, with the Dax down 1.7 per cent, the CaC off 3.3 per cent and the FTSE off 2.6 per cent.

Finally on the rates side, US treasuries rallied at the long end on a strong 30-year bond auction, the yield dropping 10bps to 2.9 per cent after. The 10-year was then off 6bps to 1.9 per cent while the 5-year and 2-year were little changed at 0.85 per cent and 0.24 per cent, respectively.

Bits and pieces otherwise. In Europe, industrial production fell 0.1 per cent in October, following a 2 per cent fall in September, to be 1.3 per cent higher annually. UK unemployment was unchanged at 8.3 per cent in October, while claimant count unemployment was at 5 per cent. Finally, the Norges Bank cut rates by 50bps to 1.75 per cent. In the US, import prices rose by 0.7 per cent in November (largest gain in 7 months) and are 9.9 per cent higher annually.

Data out today includes Australian car sales for November at 1130 AEDT and before that at 1050 AEDT we get the December quarter Tankan. Tonight there is a solid run of data – the EC PMIs for December, EC CPI (November), and UK retail sales (November). In the US, check out industrial production (November), jobless claims and the Philly and Empire manufacturing surveys for December.

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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