SCOREBOARD: Euro rally

There was no shortage of reasons to see risk put on last night. In Europe, Greek talks have apparently resumed and the press suggests that a deal is close at hand. Then the Italians auctioned off €5 billion of a 2-year zero coupon bond at a yield of 3.76 per cent, which is about 1 percentage point lower than a month ago. In the secondary market, the 2-year yield was down to 3.58 per cent and the 10-year fell almost 20bps to be at 6.05 per cent. Similarly, the economic data of late looks to be getting better overall and we've seen over the last two sessions that despite recent growth revisions and forecasts of recession, German business and consumers remain unperturbed. According to the IFO, Germany's business climate index pushed higher in January – a full point to 108.3 (average 101) while German consumer confidence figures out last night showed confidence at its highest level since April 2011, itself the highest since 2007.

Whatever your view on the outlook, these are very positive signals and European equities responded accordingly – the Dax rose 1.8 per cent and the CaC was up 1.5 per cent, while the FTSE was 1.3 per cent higher. US equities in contrast didn't have such a good session and that's despite more good news on the data front, on balance. So durable goods orders surged 3 per cent in December, which was well above the median forecast of 2 per cent and comes after an upwardly revised 4.3 per cent spike in November (was 3.8 per cent). Core orders were also up about 3 per cent. Annually, orders are 14.4 per cent higher.

Despite this, US equities have actually sold off, and that momentum was accelerating in late trade. It looks to me to be a bout of profit-taking more than anything. Admittedly there was other data out that wasn't great – so jobless claims rose 21k (to 377k) in the week to January 14 and new home sales fell 2.2 per cent in December, offsetting a 2.3 per cent rise in the month prior. That said, claims remain below the 400k mark and have improved considerably over the last six months or so – so it's not that bad. In any case, the S&P index closed off about 0.57 per cent (1318.45) as I write, having been up 0.5 per cent at the high. While all sectors are down, telcos, energy and financials are weighing most heavily, with the fall in energy stocks occurring despite a modest bid for crude – WTI up 0.3 per cent ($99.7) and Brent up 0.9 per cent ($110.8). The Dow ended 22.33 points, or 0.18 per cent weaker (1318.45) and the Nasdaq was 0.46 per cent lower (2805.28), while our own SPI is 0.1 per cent lower (4245).

US treasuries also didn't follow the path one would usually expect following the news and data flow. There are a couple of good reasons for this more broadly. Firstly, the Fed has no intention of removing policy stimulus anytime soon, and most punters reckon that another bout of QE is a done deal, especially following commentary after the FOMC meeting. I would agree with that. Then we saw very strong demand at a 7-year treasury note auction, where $29 billion worth was auctioned off and $79 billion worth of bids was received. The notes stopped at a yield of 1.359 per cent, which apparently is a record low. So the 10-year yield slipped a bit and currently sits about 3bps lower than at 1630 yesterday (1.933 per cent). The 5-year is also off about 3bps to (0.767 per cent) while the 2-year is at 0.21 per cent (off almost a basis point). Aussie futures for their part are little changed – 3s traded on a 4-tick range and sit at 96.69 currently, while 10s traded on a 7-tick range and are at 96.050.

Finally for the price action, the Australian dollar sits at 1.0623 (high of 88) which is down smalls from yesterday at 1630). Euro is also off smalls at 1.3104 (high of 84) while Sterling is up almost 30pips to 1.5688. There wasn't really much else out otherwise.

For the day ahead, there is nothing for Australia, while in New Zealand, the trade balance is out at 0845. RBNZ Governor Bollard then gives a speech at 1100 AEST. Otherwise tonight, the main data release will be USD fourth quarter GDP. The consensus is that GDP rose 3 per cent in the quarter.

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

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