SCOREBOARD: El saviours

Fears of a European contagion eased as investors returned to Spanish and Italian bonds overnight.

Investors have taken a renewed liking to Spanish and Italian bonds, easing fears of contagion. They saw a big rally overnight with the 10-year Spanish yield down 20 basis points to 6.07 per cent and the Italian yield down to 22 basis points to 5.57 per cent. No reason to fear contagion when you know that European leaders will do what they need to do to stem the crisis. Well, that’s not entirely true as there is still a hefty premium there – but it eased last night. Biggest move since January for the Spanish.

What investors do love is bonds, and doesn’t the German government know it. They intend to auction off about €5 billion in 2-years with an incredibly attractive coupon of nothing – and no discount to boot. A truly zero coupon bond. Not that it is really too different from the 0.25 per cent they offered in April. Good luck to them – AAA and all that. Really, it’s just one more reason to take Italian bonds. There is no chance Italy will default or need a bailout (Spain’s only a small one), so it’s a gift. Just buy and forget, take the yield. Elsewhere, US treasuries sold off slightly with the 10-year yield up a basis point or so to 1.78 per cent, the 5-year yield up about the same to 0.76 per cent, while the 2-year barely budged and sits unchanged at 0.29 per cent. Aussie futures in turn rose 3-4 ticks with the 3s at 97.56 and the 10s at 96.87.

Over in equity land, European stocks had their biggest gain in about a month as the Dax rose 1.7 per cent, while the CaC and FTSE rose 1.9 per cent. Again it all seems to be stemming from this newfound confidence that European policymakers will do something, and I have no doubt they will if they need to so it’s certainly not misplaced.

In the US it was a different story entirely and the S&P barely ended in positive territory but it was a whippy one. At the high, for instance, the S&P was up 0.9 per cent, while at the low the index was down 0.5 per cent. Most of those losses came in the last hour of trading after a report surfaced stating the former Greek prime minister (Lucas Papademos) said the country was considering plans or thinking about starting to consider plans, to leave the eurozone (good luck with that). Seriously, Greece can’t even get a functioning government together. How are they possibly going to get all the necessary legislation through parliament – the considerable legislation that would be required if they were going to leave? It’ll take the better part of a decade just to debate it, by which point their economy would cease to exist. Per capita GDP would likely be higher in the Congo.

In any case, the S&P fell about 0.9 per cent soon after, hit that low then rebounded into the close – at which point it was up 0.05 per cent (1316). Phew. Financials, utilities and consumer services were the key outperformers overnight with basic materials tech and energy the main deadweight’s, what with copper down 1 per cent and crude not too far behind (WTI off 1 per cent to $91.66 and Brent off 0.5 per cent to $108). The Dow then fell 0.01 per cent (12502), the Nasdaq was 0.3 per cent lower (2839), while the SPI was off 0.4 per cent (4117).

Finally for the price action, we saw Australian dollar fall almost a big figure to 0.979, following the euro lower which was down about the same (1.2682). Sterling was otherwise little changed at 1.5761 and yen was at 79.98. Gold then dropped $20 to $1568.

In terms of the data out last night there were a few bits. What helped the initial bid in the US, apart from European moves, was a stronger-than-expected 3.4 per cent gain in existing home sales (April data and 2.9 per cent expected). At 4.6 million they are still soft and below average (5.3 million), but the modest recovery is there. Then we had the Richmond Fed manufacturing index which fell to four in May from 14 (average is -1). Finally we saw CPI which rose 0.6 per cent in the month to be 3 per cent higher annually and well above target, as it has been for years. The OECD still thinks the BoE has room to cut rates, which is true if you don’t have an inflation target.

As for the calendar today it consists of Japanese trade data and some minor Aussie data releases (skilled vacancies and a leading index). Tonight watch out for the BoE’s minutes and retail sales. US data includes house prices and new home sales.

Adam Carr is a leading market economist. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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