SCOREBOARD: Strong bonds

Spain and Italy are raising money with greater success, but softer data halted market momentum.

Well the good news is that Spain and Italy are raising cash much more cheaply than they were only a month ago. Spain issued €4.272 billion of a 4 per cent 07/2015 bond at a yield of 3.38 per cent, which compares very favourably to the 5.187 per cent they had to pay in December. Bid/cover was good at 1.8 and it was even better for the 04/2016 bond, at 2.2 (yield of 3.748 per cent, down from 4.871 per cent last time). The 10/2016 bond went out at a yield of 3.912 per cent, which is down sharply from the 4.848 per cent they paid last time and given the original target was for €4-5 billion and they put out basically double that, it was regarded as a very good auction indeed.

The result does seem to confirm the ECB’s view that the liquidity they are providing to the market (at least some of it) is finding its way back to sovereigns – recall they pumped out €500 billion in the first 3-year LTRO and while bank deposits at the ECB are at record highs, the ECB’s president (Mario Draghi) said that the banks depositing those funds were different from the banks that are borrowing at the LTRO. "The more time passes...the more we see signs it has been an effective policy measure,” he said.

The ECB held rates steady as expected last night by the way, but said they stood ready to act again if conditions deteriorate. At the moment they are of the opinion that conditions have stabilised and they’re obviously very pleased with the impact of the LTRO, which Draghi said had averted another credit crunch.

Italy then sold off about €12 billion in bills at sharply lower rates (12 month bills at a yield of 2.735 per cent against 5.952 per cent last time), which bodes well for tonight’s €4.5 billion bond auction.

Happy days it would seem, although there weren’t too many signs of that in the end. The euro shot up about 84 pips or so from 1630 AEDT (currently 1.2829) and Italian and Spanish bond yields fell sharply in the secondary market (Italian 10-years down 35bps to 6.63 per cent with the 2-year down 46bps to 4.25 per cent). Indeed European equities got a decent bid initially, but failed to hold those gains.

A key reason was the softer tone to US economic data – it looks to have capped any enthusiasm sparked from the solid European debt auctions. Retail sales, for instance, rose only 0.1 per cent which was weaker than the consensus for 0.3 per cent, while sales ex autos and gas were flat. Small upward revisions to back data meant the result wasn’t too bad overall and for the quarter, sales ex autos and gas are up 1.4 per cent, which is pretty good.

Similarly, new jobless claims jumped 24,000 in the week to January 7 to 399,000, which is a six-week high. Not a good result at all, although seasonal adjustment at this time of year is notoriously difficult and so most analysts would want to wait for a few more numbers before suggesting there was some ominous change in trend.

In any case, the reversal was on, stocks went offered and in the end the Dax was 0.4 per cent higher, the CaC ended down 0.2 per cent while the FTSE was also off 0.2 per cent. Across the Atlantic, US stocks closed modestly higher on Wall Street, but spent the session bouncing around 0 (S&P down 0.5 per cent at the low and up 0.3 per cent at the high). At the close of trade the S&P500 was 0.2 per cent higher (1,296) with basic materials, industrials and telcos the key outperformers, while energy and utilities lagged. Crude took a fair hit after the EU said that Iran’s oil embargo would likely be delayed for six months. WTI is currently off 1.8 per cent ($99.05), while Brent is down 1.2 per cent ($110.9). The Dow for its part was 22 points higher (12,471), the Nasdaq rose 0.5 per cent (2,725), while Australia’s SPI was 0.6 per cent higher (4,176).

US Treasuries had all of that that plus $8.74 billion in short-end treasury sales from the Fed (operation twist) and average bidding at the $13 billion 30-year auction to contend with. The auction stopped at 2.985 per cent with cover at 2.6, a little below the average of 2.68. For the major T-notes, that translated into a modest steepening as the yield on the 2-year slipped a bit (0.23 per cent) while the 10-year yield rose just under 2bps (1.93 per cent). The 5-year was otherwise up just under a bp (0.83 per cent) and so had a comparatively tame session. On a 5 tick range the 3s sit at 96.82 (down 3 ticks) and the 10s (on a 4 tick range) sit at 96.17 (down 2 ticks).

As for the price action elsewhere, we saw the Australian dollar trade on an 84 pip range – currently at 1.0334 or 30 pips higher than 1630 AEDT. The sterling was 20 pips higher (1.5340) while the yen is at 76.76 (little changed). Finally, gold was up smalls ($1,647), silver was 0.8 per cent higher and copper shot up 2.8 per cent.

Quite a few bits and pieces otherwise. For the data, we saw US business inventories rise 0.3 per cent in November and shipments rise 0.3 per cent ( 9.6 per cent year-on-year). European data was all weaker – EC industrial production fell 0.1 per cent ( 0.2 per cent expected) in November to be 0.3 per cent lower annually. UK industrial production was off 0.6 per cent (-0.1 per cent expected) to be 3.1 per cent lower annually while in India, industrial production was stronger than expected in November, rising by 5.9 per cent year-on-year compared to expectations for 2.1 per cent. Finally the Bank of England kept rates and QE unchanged.

Pretty quiet for Australia and New Zealand today with no data to report. Elsewhere, we see UK producer prices tonight, with US trade and the Michigan Uni consumer confidence index (Jan) following later. There is also more Fed speak (Evans, Duke and Lacker).

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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