The Euro remained fairly resilient for much of today despite the ominous music in a minor key that continues to grind on in the background. A Spanish auction of 3-month bills saw yields soaring to 5.1%, which prompted Bloomberg Businessweek to note that Spain had to pay a higher yield than Greece and Portugal paid at a recent auctions for similar debt. 10-year Spanish yields vaulted another 8 bps higher in today’s trade. Representatives from Spain’s new ruling party, the Partido Popular have been making noises since their Sunday election victory that something must be done as Spain can’t afford to finance itself at 7%.
With a Germany CDU party finance spokesman today saying that Germany doesn’t have any “new bazooka in the bag” (a term often used during the EFSF negotiations of late October to describe the amount of money being thrown at the problem), helped confirm the seeming impasse within the Euro Zone on further action. At this point, reputable analysts are suggesting that a hard default could be in the works, while others suggest we are limping toward the solution we have talked about in recent days – a stronger fiscal oversight in exchange for some flavor of Euro Bonds and more liberal use of ECB money printing (though that latter point still seems expressly frowned upon by Merkel and company). Most German rhetoric seems focused on the Dec. 9 EU summit and talk of “treaty changes” to the Growth and Stability pact to enforce financial discipline.
Most European sovereign yields vs. Germany pulled higher once again, including those for France, Belgium and Austria. Belgian spreads to Germany moved very sharply and to a new record wide for the cycle as the Belgian negotiator responsible for leading budget negotiations among six parties, which have apparently collapsed. Belgium has effectively had no government since the summer of last year. In Austria, regulators are asking the largest Austrian banks to stop lending Austrian funds to CEE countries, saying that any loans must be raised locally in those countries. This is apparently in an effort to help Austria retain its AAA rating. Austrian banks have been the largest lenders to CEE in Europe and the three largest Austrian bank’ loan amounts are larger than Austria’s GDP.
Shaky EM
Risk was on the barbie not only Down Under, where an AUDUSD consolidation attempt was reversed by the time of this writing, but all across emerging markets as well, where the likely culprit of the mayhem is capital flows on withdrawals of investment funds from emerging economies. Adding to EM woes as an asset class, Hungary today formally requested assistance from the IMF (note especially the nervousness this could create about Austria and feedback into that country’s banking system and the entire EU financial crisis, though CEE currencies were relatively calm in today’s trade). USDMXN, meanwhile, was close to poking through its highest levels since the financial crisis above 14 and the Indian rupee notched an all-time low against the US dollar.
Looking ahead
Later today, we have an important event risk in the form of the FOMC minutes, which the market will be picking through for signs of the flavor and timing of the next round of QE. The strength of the latest rounds of US economic data area a wonderfully complicating twist in the plot here.
Besides the ongoing headline risk from Europe, we have more mundane economic calendar items of interest as well: tonight in Asia we have HSBC’s “flash” PMI Manufacturing reading for November, a preliminary reading on the month’s manufacturing activity. The October reading came in above 50 (51.1) for the first time in four months (preceded by very marginally negative readings a shade below 50). Anecdotal evidence of tough times for smaller manufacturers’ abounds and understanding the Chinese data and economy is always a tough proposition, but this data point could still get a bit of attention.
Tomorrow, we have the preliminary readings for European manufacturing and services PMI’s, which have been steeply decelerating since May or so of this year. The European services PMI dipped below 50 in September and worsened to 46.4 in October while the manufacturing PMI dipped below 50 in August and worsened to 47.1 in October.
The pound is very weak, even falling against the Euro as the Euro is relatively unchanged on the day, and GBPUSD breaking down through 1.5600 at its lowest level before pixel time for this report. The budget numbers today showed austerity efforts bearing fruit, as public borrowing was far lower this October than last October and slightly lower than expected. Every month this year, in fact, has seen borrowing amounts below last year’s. Tomorrow we have the BoE Minutes on tap, with most BoE rhetoric of late aggressively dovish on the risks to the UK economy going forward from the Euro Zone crisis and a lack of shyness about the need for further QE. EURGBP 55-day moving average and the old pivot area of 0.8675 are key for determining sterling’s strength from here.
Chart: EUR/GBP
EUR/GBP has rallied in recent days as the prospects for the ECB cranking up the printing presses have gone nowhere, while it has remained clear that the BoE remains aggressively dovish. The pair once again failed to take out the bottom of the range recently and now has rallied to the key 55-day moving average just above 0.8650 and just shy of the 0.8675 area that has proved a key pivot zone on a number of occasions in recent months. Tomorrow’s BoE minutes and ad hoc Euro developments are likely to continue to drive volatility.
Since tomorrow is effectively the last day of the week for the US this week, quite a number of items are crammed onto the calendar for the US, including Oct. Personal Income, Spending and PCE inflation data, Oct. Durable Goods, Weekly Jobless Claims, the Weekly Bloomberg Consumer (Dis)Comfort survey and the final University of Michigan Confidence reading for November.
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