London Session: Eurozone Bonds and GBP Rising

This London Session report will briefly deal with what has been going on in markets today. Look out for our in-depth report due later about what the market expects from the upcoming EU summits.

Dealing with today’s action first, it has been a head-spinning day with headlines dominating price action. Commentary from various German officials have tried to convince the markets there is no rift with France and Europe’s leaders are set to meet in harmony on Sunday afternoon. Added to that they have said that no decisions will be made on Sunday, instead we have to wait for Wednesday.

After receiving a drubbing at the hands of EU officials, which has threatened to impose changes to the way that rating agencies can assess sovereigns by banning ratings for member states that are in receipt of bailouts, Fitch has come out and said that changes to the EFSF won’t threaten France’s AAA credit rating.

Combined with some comments from outgoing ECB President Trichet, who gave another swan song in Poland today, the sum of all these comments amount to nothing and don’t tell us anything we don’t know already. So it could be a long afternoon as we head into the European close.

Thankfully the price action has been more interesting. Italian bond yields hit 6% earlier, but have since moderated by 6 basis points, rumoured to be on the back of ECB bond purchases in the secondary market. French and German 10-year bond spreads have hit another record high today, with credit investors seemingly immune to the comments coming out of Fitch rating agency. Until there is a clear solution to the crisis then uncertainty is likely to keep a lid on the bonds of Europe’s most financially troubled members.

The IFO index of industrial sentiment in Germany was slightly higher than expected for October. It has held up better than other sentiment indicators recently; however the index fell to its lowest level since mid-2009.

Elsewhere, the UK public finance figures for September were stronger than expected, suggesting that the government’s fiscal consolidation plan is working. This is likely to boost Gilts as a safe haven asset class, and the UK could see even lower interest rates as a result of money in the credit markets being diverted to the UK from Europe.

The pound has done very well today. Some will wonder if it is attracting safe haven flows as Europe deals with its problems. A strong pound may partly be due to a boost from the public sector finance data, GBP/USD also received a boost from a large sell order in EUR/GBP earlier this morning. The pound is rising along with the Aussie, which reflects the risk-on sentiment in the markets. European bourses are higher by about 1.5% so far today. However, the Euro is the laggard as investors remain reluctant to establish longs or square up short positions in case the next few days fail to deliver the expected goods to solve Europe’s intolerable debt situation. The extent of negative sentiment towards the euro is reflected in a weaker EURCHF, which fell as low as 1.2200 this morning even though it makes intervention from the SNB to limit Swissie strength more likely.

We expect risk positions to be neutral as we head into the weekend. Uncertainty remains high, investors are largely on the side-lines and the risk of volatility is rising as risk continues to move higher. As we have mentioned before, this is not the time for market heroics and if you are trading the consider protecting your profits by using stop losses and trailing S/L’s for winning positions.