Cypriot capital controls (limit of €300 per day and "close scrutiny" of transactions over €5000) are to be tested shortly as the country's banks reopen. Anxiety is high and safe haven flows were in vogue – kind of. It doesn’t help the mood when you see news reports that the Italian Treasury auction held last night was poor, investors fearful.
Truth is, it actually wasn’t that bad and was still oversubscribed. They auctioned off €7 billion worth of 5- and 10-year bonds, the 10-year at lower yields (4.66 per cent for 4.83 per cent in February) and I can’t see how that’s a bad thing given everything that is going on. Fair to say the 5-year went out higher at 3.65 per cent from 3.59 per cent and naturally it was the 5-year that got all the attention.
Demand for these auctions was regarded as weak – again, an embellishment, as bid-cover was only slightly lower (we’re talking decimal points – 1.33 times, versus an average of 1.48 so far this year on the 10-year, while for the 5-year the bid-cover was 1.22 times compared with an average of 1.4).
Also grabbing headlines is the fact that attempts at creating a governing coalition failed in Italy after the new 5-Star party refused to support the centre left Democratic Party. Again, that’s quite normal Italian politics in play.
It was the secondary market where we saw most of the action though. The offer on Italian and Spanish bonds was on, and yields on the 10-years spiked 20 bps for Italy (4.7 per cent) and 13 bps for Spain (5.05 per cent). This is a very big call given the backstops in place. You know, the European Stability Mechanism – I think the stability fund is still running and of course the European Central Bank can just buy bonds, which they haven’t really been doing much of.
To put some perspective on it, yields are still lower than in late January/early February, and don’t get me started as to how much lower they are relative to the last two years. All in all, bond markets are well behaved. Having said that there is some evidence of safe haven flowage – and we saw a pretty decent rally in the Treasury space again last night. Consequently, the US 10-year yield fell 6 bps to 1.85 per cent, the lowest since since the start of the month. The 5-year is down 3 bps to 0.74 per cent and the 2-year is at…Anyone, anyone?...0.25 per cent!
The money looks to be flowing out of not only Italian and Spanish bonds but also European stocks, with the Dax down 1.2 per cent, CaC off 1 per cent and FTSE100 0.2 per cent weaker. Moreover, the euro was weaker by about 70 pips to 1.2742.
At this stage and depending on how these capital controls play out, I’m not sure that this is the start of anything ominous. Most of the negative news flow wasn’t really that negative and more to the point, equity markets in the US have proven to be more resilient, and that was still the case last night. It wasn’t a good session in the normal context of the word, but given the backdrop, seeing stocks mixed (as I write) is a good session.
At this stage, the S&P looks to have recovered from a low of 0.7 per cent to be flat (1563), the Dow is down 0.2 per cent (14,526) and the Nasdaq is up 0.2 per cent (3257). Similarly, commodities weren’t smashed, were mixed even, though with small moves: crude was up 0.2 per cent ($96.5), copper was 0.3 per cent higher and gold was up $9 to $1604.
In price action elsewhere, the Australian dollar is little changed at 1.0445; ditto for the British pound (down 20 pips to 1.5129); while the yen is at 94.4. There wasn’t much more to the session – the only data worth commenting on is pending home sales in the US, down 0.4 per cent in February after a 4.5 per cent surge the month prior.
Looking to the day ahead then, the SPI suggests our market will be 0.3 per cent weaker. Data-wise, we see TD’s inflation gauge (for Oz) today at 1030 AEDT, followed soon after by private sector credit numbers at 1130 AEDT.
That's the major stuff, though there is another speech by the new Bank of Japan governor and, well, he’s just all jittery and super keen to start printing money.
Other than that we see German retail sales and labour force data, while for the US the key data are the foruth quarter GDP revisions (now forecast to rise 0.5 per cent) and initial jobless claims.
That’s it. I hope you have a great day and a very happy Easter. Drive safely, be kind.
