It was a week of spreads. The failure of the ECB to wholly stabilize Italian, Spanish and French yields, despite political developments in Italy, had the market applying risk aversion trading strategies slowly all week. Most EUR relief rallies provided the market better opportunities to either exit their riskier positions or instigate further negative bets. As the slow-motion risk meltdown continues it has allowed the dollar and the yen to trade broadly firmer. The Swiss, as a reserve currency, has been taken out of the equation because of the SNB revaluation actions.
The absence of an aggressive ECB bid has further boosted perceptions of systemic risk in the Euro area.The surprise to most has been how orderly and gradual the FX moves have occurred. Normally, with any risk aversions trading strategy decision, Ã¢â‚¬Å“PanicÃ¢â‚¬Â seems to be the outlier as investors all run for the exits at the same time.
Below are some other highlights of the week:
- The week started with the Italian parliament passing key growth measures, and Mario Monti been given a mandate to form a government. He will wear two hats, that of Prime Minister and Finance Minister.
- Italy successfully auctioned EUR3b in 5-year bonds with a healthy bid to cover, but the size of the offering was well below typical auction size.
- Euro area IP fell -2%, m/m, in September after a +1.4% rise in the previous month. This was a tad better than the market consensus for a -2.3% fall. The weak trend is likely ongoing.
- On Tuesday, Italy’s 10-year yield pushed back through +7% before coming off following reports of ECB buying. French and Spanish bonds continued to underperform.
- UK: September inflation printed a touch below expectations at +5%, y/y, down from +5.2% in August. The decline in food and transport prices helped. The core (ex-food and energy) accelerated to +3.4%, y/y and above the +3.2%, y/y forecast.
- UK: Governor King’s Ã¢â‚¬ËœletterÃ¢â‚¬â„¢ continues to emphasize downside risks to growth stemming from global uncertainties, with inflation more likely to undershoot the +2% target in the medium term.
- EUR: Growth remains subdued at +0.2%, q/q, in Q3. Digging deeper, the German and French economies expanded at +0.5% and +0.4% respectively. Elsewhere was weaker. Including weaker PMIÃ¢â‚¬â„¢s and confidence indicators, analysts note this indicates Ã¢â‚¬Å“a recession riskÃ¢â‚¬Â.
- EU: German ZEW survey printed below consensus at -55.2, the lowest level in three-years.
- UK: BoE Inflation reported inflation at about +1.5% at the end of the forecast period, down from +1.9% in the August report.
- EU: The Euro-bond market continues to send danger signals, with Spanish yields up sharply following its 10-year bond auction on Thursday, Italian 10-year yields again trade above +7%, and French 10-year yields managed to print new highs for the year.
- EUR: Spain successfully auctioned EUR3.6b of 10-year bonds. Bid-to-cover on the auction was a Ã¢â‚¬Å“reasonableÃ¢â‚¬Â +1.54 times. However, the amount sold was below the EUR4b on offer.
- ECB again bought Spanish and Italian bonds, but Ã¢â‚¬Ëœnot in sufficient size to stabilize the marketÃ¢â‚¬â„¢.
- German government comments continue to warn against viewing the ECB as a lender of last resort for European governments. Rhetoric provides another reason to pressurize the EUR.
- UK: Retail sales rose +0.6%, m/m, well above consensus forecast for a -0.3% fall. Note that deteriorating labor market conditions does not support this trend. With the BoE inflation projection below 2% in the two year horizon based on the current size of QE, analysts now expect further QE extension next quarter.
- SEK: Average house prices fell in September, dropping – 7.1%, y/y. This should support expectations for a rate cut by the Riksbank. Futures market pricing in a -50bp cut by Q1.
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