SCOREBOARD: Euro bondage

European bond auctions will set the market tone for some time, but at least US jobs data is providing hope.

European worries set the tone again for much of the session overnight, and it is a bit of a worry to see Spanish and Italian bond yields spike sharply again. Indeed, 2-year yields were up 26bps on Italian debt (4.86 per cent) and 18bps for Spain (3.65 per cent) and that’s despite solid demand at a French bond auction. Almost €8 billion was auctioned off in total (10/2021, 10/2023, 04/2035, 04/20041) and while the results were generally regarded as solid, yields were in some cases higher than a month ago. So solid but uninspiring is the general view of the auction, which isn’t good enough it seems given upcoming Italian and Spanish taps next week. The market is watching these issues closely and the ease or struggle the ‘club med’ countries have in raising funds, will likely set the market tone for some time. Note the EFSF also auctioned off some debt, raising €3 billion at a yield of 1.77 per cent or 149bps over bunds.

As mentioned, sentiment wasn’t great last night and the euro fell a further 130 pips to 1.2790, which is the lowest level in about a year. European stocks were all weaker as well, the Dax was off 0.3 per cent, the CAC fell 1.5 per cent and the FTSE was down 0.8 per cent.

Wall Street was initially weighed down by these events and, at the low (just after the open), the S&P was down 0.9 per cent and that’s despite some seriously decent data on the jobs front. Now the ADP employment report doesn’t have a great one-for-one correlation with payrolls. But it can be useful in determining surprises on either side and last night’s 325,000 gain in December (175,000 expected) points to a decent upside surprise in tonight’s payroll figure. Combined with a 15,000 drop in new jobless claims in the week to December 31 (to 372,000), labour market signals are good so far – well if not good, then looking better.

The bid wasn’t put on until a couple of hours later – more positive data in the interim with the non-manufacturing ISM rising to 52.6 in December from 52 and chain store sales rising 3.5 per cent year-on-year in December. At the close, the S&P ended up 0.3 per cent (1,281) with financials ( 1.5 per cent), tech and consumer services leading the charge. The Dow lost 3 points (12,415), the Nasdaq was up 0.8 per cent (2,670), while Australia’s SPI is off 0.2 per cent (4,127).

On the debt side, action was reasonably subdued – ranges on the major T-notes from a basis point on the 2-years to 8bps on the 10-years. Currently, the only move from 1630 AEDT was on the 10-year, which is up a mere 2bps or so to 2 per cent. The 5 and 2-years are unchanged at 0.26 per cent and 0.88 per cent, respectively, which also means there was very little action on our futures. On a 5 tick range, the 3s are unchanged at 96.82 and the 10s are down a couple of ticks to 96.14.

Price action elsewhere showed the US dollar generally stronger, the dollar index up 0.9 per cent from 1630 AEDT. So we saw the Australian dollar off 65 pips to 1.0259, the sterling dropped about 115 pips to 1.5487 while the yen bounced a bit to 77.16 from 76.74. Commodities were then mixed, with decent falls seen in the crude price after an Energy Department report suggesting that inventories rose over the last week. As I write, WTI is down 1.5 per cent ($101.7) and Brent is off 1 per cent ($112.5). Copper was then off 0.8 per cent, although gold rose $6 or so to $1621 and silver was up 0.5 per cent.

As for the remaining news and data flow – we saw European industrial orders rise 1.8 per cent in October, which was a little less than the 2.5 per cent expectation. European producer prices then rose 0.2 per cent in November to be 5.3 per cent higher annually (from 5.5 per cent the month prior). In the UK, the services PMI rose to 54 in December from 52.1, while German retail sales fell 0.89 per cent in November ( 0.2 per cent expected and from -0.2 per cent; was -0.7 per cent, in October).

No real major Aussie or Kiwi data today, but it’s a busy one tonight with US payrolls. The consensus so far is that non-farm payrolls will rise by 175,000 in December, although last night’s jump in ADP employment suggests some upside to that. The unemployment rate is expected to rise to 8.7 per cent from 8.6 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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