Euro watches Italian bond auction with caution

In what is a quiet start the day in the European session investors will be looking for impetus from German CPI figures which are likely to confirm year-on-year inflation rate at 1.5 percent, the lowest since 2010.Euro watches Italian bond auction with cautionThe recent soft price growth allows the European Central Bank room to introduce stimulus, to counterbalance the Eurozone downturn.

However the ECB appears unlikely to act whilst political instability in Italy dents its policy agenda.

As a result, the data’s influence on the single European currency is likely to be restricted and therefore a bond auction of one year Italian bills could be of keen interest.

A rise in typical yields or a major fall in the bid-to-cover ratio, a measure of demand, will suggest a return to growing sovereign risk jitters and could weigh heavily on the Euro.

Meanwhile, UK Industrial Production is seen posting a nominal 0.1 percent monthly increase over the same period.

A release accurate with projections would fall in line with recent trend averages, presenting little direction to traders on future BOE policy and Sterling could survive unscathed.

Priced-in stimulus bets have been swelling over the past five weeks and Sterling has duly declined. Speculative positioning is at its most net-short in four months, suggesting prices may be susceptible to an improvement with any positive news.

Continuing the UK theme and house sales hit their highest level in more than two-and-a-half years last month but we should not assume we are at the start of a housing boom, according to the Royal Institution of Chartered Surveyors (Rics).

They expect a rise in future sales and despite inquiries from prospective buyers had remained stagnant since January’s cold weather.

The market has undoubtedly been supported by the Funding for Lending scheme, which was intended to boost lending by offering low-priced funds to mortgage and loan providers.

Nevertheless, the number of sales is still about half the total seen in 2007 before the financial crisis hit, according to figures from HMRC.

The market has had little impetus in recent years, although a number of government systems have supported the market for new homes. However the problem remains that borrowers find it tough to obtain the deposit necessary by lenders to secure a home loan.

Wise money markets consolidate

Yesterday the wise money markets showed signs of consolidation following strong US economic data on Tuesday and evidence that the market has not lost confidence with Italy yet.Wise money markets consolidateItaly went to the well yesterday and their debt auction was relatively positive and encouraging given the political backdrop.

It seems more likely that we will see a Bersani-Berlusconi government but this is far from a done deal and the uncertainty should keep the market on its toes.

In the US, Federal Reserve chairman Ben Bernanke was speaking yesterday and he indicated that he is no hurry to exit the QE programme which also helped ease market concerns.

US equities closed over 1% higher and the momentum continued into Asia with the Nikkei up more than 2%.

Asian markets were also boosted by confirmation that Haruhiko Kuroda is to become the next Bank Of Japan governor and this will undoubtedly lead to a more aggressive Bank Of Japan as already indicated by Prime Minister Shinzo Abe.

We have unemployment data from Germany this morning and a bout of US data this afternoon with initial jobless claims and Chicago PMI.

Italy will also continue to come under the spotlight and the market will be watching the peripheral bond markets closely.

Italian elections weigh heavily on wise money markets

The wise money markets continued to feel the pressure of the looming Italian elections as they closed in the red yesterday, providing strength to the US Dollar.Italian elections weigh heavily on wise money marketsThe elections are at a stalemate with no clear winner and with pretty bleak prospects of any of the parties finding a common ground to form a coalition.

The gridlock is expected to last for a while, and we may see a decision prolonged all the way into May when they will go back into polls.

All optimism and consumer confidence in the Euro markets this year has transformed into a major concern for investors that the resulting paralysis from a hung parliament could see economic and fiscal reforms fall behind schedule and send bond yields back up; which possibly will spread to other peripheral economies.

The bloc’s currency reached to lows of 1.3025 in trade yesterday but has picked up a little this morning to 1.31 against the greenback.

From the US, we witnessed Fed Chairman Ben Bernanke submit his bi-annual report to Congress.

His comments did have a marginally hawkish tone as he continued to stress that the US does not see the potential costs of increased risk taking outweighing the benefits of promoting a stronger economic recovery as he continued to back the current asset purchases and quantitative easing programme stating they were supporting the economy with minimal risk to inflation.

US figures also revealed a jump in consumer confidence and better than expected new home sales which helped to provide some support for US equities and the US dollar.

With the exaggerated selloff in Sterling late last week, after the AAA rating downgrade, the Pound has recovered a little bit of its losses against the euro as it went back to levels of 1.16 yesterday.

However, we have seen a slight slump in the currency as markets factor in the UK GDP figure out later this morning expected at -0.3%. Overnight, we had the UK inflation report after which several Bank of England members suggested they are open to further quantitative easing even with the prospects of rising inflation.

The deputy governor, Paul Tucker also hinted that we may see negative interest rates, as he tries to get banks’ lending more to businesses. Sterling has opened trade this morning fairly weak at 1.5140 against the greenback.

Wise money markets struggle on eurozone fears

Risk assets faded particularly in Europe as a result of new fresh political strains in Italy and Spain.Wise money markets struggle on eurozone fearsElection uncertainty in Italy increased as former PM Berlusconi plots a return and government corruption allegations in Spain hit equity markets and peripheral bonds.

Consequently the EUR/USD fell 126 points from its highest close in 14 months on Friday, hurt by comments from the French finance minister warning about the dangers of euro strength.

Poor Spanish employment data did not help matters while service sector confidence indices in the eurozone today will also stoke further concerns exposing both continued contraction for most countries and divergence in the bigger economies, namely Germany and France.

Caution will succeed in the short term as markets start to query the legitimacy of the rally in risk assets listed over recent weeks. EUR/USD downside will be limited to support around 1.3458 in the near term.

Overnight the Royla Bank of Australia decided to maintain interest rates at 3.0%, after fresh growth concerns and they see potential to ease policy further.

At the last month’s meeting, rates were cut 25 basis points to 3% mentioning fears over the Fiscal situation in the US, China growth as well as European weakness.

The Aussie rallied against the US Dollar after the statement was anticipated and was priced into the currency movements prior to release.

It was a slightly different tone in today’s statement; the Reserve Bank Governor Glenn Stevens noted that the US appeared to have evaded a fiscal contraction alongside growth in Asia steadying which provided comfort that the region was improving.

The RBA did however, make reference that the Australian Dollar was higher than expected, and that inflation at its current state would ‘afford scope to ease policy further’.

Today in the UK we have PMI Service data for the month of January, where the reading is expected to be 49.5 up from 48.9 in December.

The survey summarises the opinions of Purchase Managers on future demand and orders and therefore a view on the sector as a whole.

Therefore a higher PMI suggests that material purchases are increasing and the economic outlook is positive.

Elsewhere we have Eurozone retail sales which are expected to show a fall of -1.4% for the month of December and could be a key number for the Euro’s performance in the early session.

Monti resignation upsets Italian stability

Mario Monti, the Prime Minister of Italy, has announced that he will resign after the 2013 Italian budget is passed prompting the elections to likely be moved forward to February.Monti resignation upsets Italian stabilityThis has continued to weaken the Euro with last week’s announcements that German and EU growth is likely to falter moving into 2013 with Spain flirting with a full bailout if their expectations are met.

A good Non-Farm Payroll figure out of the US last week helped to shock the markets to shore up with many analyst’s expecting a sharp pull back on the figure, mostly related to Hurricane Sandy but it appears Santa Claus may have had a helping hand with employment in the run up to Christmas.

This is likely to produce another fall in US unemployment figure.

As recent trends suggest, the markets will be awaiting the US Fiscal Cliff negotiations and Wednesday’s interest rate decision.

After last week’s Autumn Statement from Chancellor Osborne the news continued to be negative in the UK with industrial and engineering data triggering a sell off on the GB Pound.

With the interest rate decision last week to keep rates and QE on hold likely to continue, the markets will be looking for a positive unemployment figure on Wednesday and looking towards the 19th December for the minutes from this month’s BoE meeting.

A busy week ahead for interest rates with them reaching over 1.31 EURUSD, 1.61 GBPUSD and below 1.23 GBPEUR earlier in the week then once Mario Draghi hit the wire on Thursday fell back to below 1.29 EUR/USD and pushing GBP/EUR above 1.24 again.

EU agrees banking union

Late last night EU leaders finally agreed to a banking union between member states, adopting a legal framework by the end of 2012 giving the ECB overall control of the supervision of EU banks.EU agrees banking unionThe rapid pace of reform is being cheered in the markets this morning by a rise in the value of the euro, but the key question of whether the EU rescue fund will be able to inject cash directly into stricken banks was left unanswered after pressure from the Germans.

Overall the move is a very positive one for the euro and is likely to continue the momentum the single currency has built up over the last week as periphery bond yields continue to fall.

Italy also managed to get away almost €18 billion in bonds yesterday, something that 6 months ago would have been impossible.

The ECB can be pleased with its OMT announcement so far.

Around the markets today German PPI data was marginally higher than expected, 1.7% against the consensus forecast of 1.6%, and we look towards UK public sector net borrowing data and Canadian CPI date this afternoon.

The UK government has announced that several large pension schemes have signed up to the pensions infrastructure platform, a policy aimed at kick starting the economy by using money from pension funds in under-invested road and rail projects.

The size of the funds is expected to reach £2 billion and is expected to launch in early 2013.

Wise money markets upbeat about euro’s prospects in anticipation of ECB action

Global equities have rallied overnight as the wise money markets have remained optimistic that the ECB will provide further stimulus to the ailing economy along with the Federal Reserve. Wise money markets upbeat about euro's prospects in anticipation of ECB actionThe optimism has come from further weak economic data from Italy (Italian GDP was well below expectations at -0.7% and German factory orders subsiding as well), making it more likely that the ECB may resort to some measures.

It was confirmed that Greece has agreed to the Troika’s reform package, however ratings agency S&P has further changed their outlook to negative as they believe they will need more funds to prevent a further default.

Spanish bond yields moved down 11 basis points yesterday after the Spanish prime minister considered that they may need a bailout.

The dilemma for now, is that in order for them to do so, they need to sign an EFSF memorandum which they aren’t willing to do till they get terms laid out by the ECB.

On the other hand, the ECB is reluctant to lay down the terms until they have the memorandum signed.

The consideration of a possible bailout from Prime minister Rajoy has provided some impetus to EUR-USD which seemed to hold well above 1.2350.

With Mario Monti of Italy also jumping on the bandwagon of considering a bailout, the opposition parties have added pressure on him not to do so.

There are a few concerns that should the ECB not intervene in a timely fashion then the euro could suffer another sell off.

In the US, the positive outlook in the markets continued as the S&P 500 rallied to 1400, which is the highest in the last 3 months.

Spanish bailout fails to shine as debt interest rates jump

Following the announcement over the weekend that Spain was obtaining access to €100 billion for its struggling banking sector, the money markets rallied, boosting risk assets whilst safe haven assets were pressured. Spanish bailout fails to shine as debt interest rates jumpThis was certainly the case in the morning session yesterday, however as the day progressed it became clear the market viewed this as a temporary fix, resulting in Spanish and Italian yields tipping well over 6 %.

It was a similar situation in the equity markets with the Dow Jones falling 1.1% and the FTSE down 0.2% following an earlier climb of 2%.

As for currency markets the Euro reached a two and half week high at 1.2649 but as market sentiment switched, this finished at 1.2502.

For final clarification of how the market viewed the bailout, Fitch the rating agency downgraded the two Spanish banking powerhouses of Santander and BBVA last night from A to BBB+.

With the Greek elections this weekend it will ensure the euro will have a turbulent week.

Greece’s close neighbour Cyprus announced yesterday that it is heading towards its own bailout because its banks have a huge exposure to Greece.

The communist Cypriot government has struggled to borrow from the bond market for 12 months as investors lost confidence in their ability to repay debt.

The fear in the market now is that Italy may follow Spain and Greece in needing a bailout which was reflected in the bond market prices mentioned above.

Back to the UK and the property market is still stagnant according to the Royal Institution of Chartered Surveyors (RICS).

In the last quarter they reported sales on only 23% of homes on their books as opposed to 41% in 2007.

The drop has been largely attributed to reluctance in lending from banks to potential home buyers.

“Ongoing economic instability in the UK and overseas has continued to undermine consumer confidence, and the reluctance of many banks to offer affordable mortgage products has created something of a stagnant market” according to RICS.

Italian bonds turn to rise

Italian borrowing costs soared yesterday following new concerns about their ability to reduce its high levels of debt. Italian bonds turn to riseIn the latest auction the Italian government paid an interest rate of 3.89%- up from 2.76% last month and this has been against the recent trends but investors are becoming increasingly sceptical over Italy’s and Spain’s ability to reach deficit targets.

As a result newly elected governments in both countries have announced austerity measures to reach strict debt reduction targets.

Coupled with these figures, Greece published its latest unemployment data yesterday indicating a further rise with the overall rate pushed to 21.8% up from 14.8% at the same point last year.

Despite the bad news the euro remains towards to the higher of its recent trading range against the US Dollar currently trading in the high 1.31s and Sterling trades just above 1.21 at 1.2104.

So far this morning China has published its latest growth figures revealing the world’s second largest economy has grown at its slowest pace for nearly three years.

GDP increased by 8.1% down from 8.9% in the previous quarter and below expectations of 8.3%.

The numbers are being blamed on the fall in demand for exports from the Europe and the US and consequently we could see risk assets hit hard today.

To end the week we have the Michigan confidence figure, which assesses consumer confidence on personal finances, business conditions and purchasing power based on telephone surveys and provides a real time assessment of US consumer sentiment.

Spotlight returns to risky Europe

The spotlight is returning to Europe after a brief period of calm. Spotlight returns to risky EuropeThe spread between the benchmark German 10 year bond and its Spanish and Italian counterpart’s widened on continued bearish data and rumours that GDP estimates across the southern Mediterranean countries will be sharply revised downwards.

The uncertainty remains whether the eurozone has enough left in reserve for when Spain or Italy need emergency rescue loans.

The worry is dragging down equity markets from recent highs along with risk currencies like Sterling and especially the commodity currencies which have been the main casualty of recent risk aversion.

There are several bond auctions in the eurozone today; Germany and Italy tap the well for smallish amounts of €3 billion and €5 billion respectively.

There will be strong demand for German debt as ever, but with the problems from last week’s Spanish auction fresh in the mind today’s offering from Italy will be closely watched for overall demand and also the price the market charges the Italian government.

The ECB meeting is on Thursday this week where it is unlikely that they will make any changes to interest rates or the special liquidity measures.

With risk sentiment waning, extra importance will be given to the Chinese GDP data due on Friday.

The data is expected to be around the magical 8% level, as it always seems to be.

Anything lower would be a real shock and compound the bearish trend we’ve followed this week.