With the US out on holiday the focus has been squarely on Europe. First Portugal’s credit rating was downgraded to junk status by Fitch, second, German bond yields continue to rise after yesterday’s ”failed” bond auction and lastly there was a much-anticipated German, Italian and French joint press conference.
The biggest event of the day so far was the press conference post the lunch meeting between Germany’s Angel Merkel, France’s Nicolas Sarkozy and Italy’s new PM Mario Monti. The meeting was ostensibly about Italy’s deficit reduction programme; however everyone was listening out for any sign that Germany was softening its stance regarding Eurobonds or enhancing the ECB’s role to include a lender of last resort.
In reality this conference could do very little: firstly the ECB is independent, thus any decisions to alter its role making it the currency bloc’s financial backstop would have to be decided by the Bank itself and then incur a change to the EU Treaty. Likewise, any Treaty changes need to be ratified by 10 of the 27 EU members including the UK– so the solutions to the crisis considered most likely to succeed could take some time.
However, there were some points from the conference worth mentioning: firstly, Merkel and Sarkozy, although they share differences on the role of the ECB in this crisis, both agree that changes to the EU Treaty should be made, which will foster greater fiscal union between the currency bloc. This was France bowing to German wishes for greater budgetary discipline within the member states before it even considers anything as drastic as jointly issued bonds (although Merkel reiterated her staunch opposition to Eurobonds during the press conference).
Although the actual Treaty changes weren’t specified, a time line to present the proposals were, and we could see these trickling out before the all-important next EU summit on 9th December.
The other point was that Sarkozy acknowledged that France and Germany have differing views on the role of the ECB in this crisis: with France advocating that the Bank could be a stabilising force, while Germany is concerned that printing money will lead to hyper-inflation. However, Sarkozy did say that the two leaders would try and find common ground, so today you could argue that a tiny little in-road was made on the very long journey to the ECB becoming the lender of last resort for the struggling currency bloc.
The euro had a good start to the day along with stocks and even some European bond yields had come off their highs, although Germany had bucked this trend. However, by the London close Italian bond yields were back above 7.1% and French yields were also higher. UK 10-year Gilt yields actually fell below Germany during the London session.
The rise in German Bund yields means that spreads with German bonds have fallen for both Spain and France. This would usually be considered good news except that the upward pressure on Bund yields is down to stress and fear in the markets, and actually suggests an escalation in this crisis. So once again we get through a week with good news on both a technical and fundamental basis thin on the ground.
The euro has slipped once again to its lowest level in 7 weeks. As we mentioned before, we believed that once 1.3500 was broken it was only a matter of time before EUR/USD reached the 1.3150 lows from early October. While it seems strange that the market was “disappointed” by no action from Merkozy on the ECB as lender of last resort issue since neither leader has the power to make that decision, perhaps the good start to the euro’s trading day was far stranger when the crisis is at such a critical stage.
Fitch said that it downgraded Portugal because of its worsening growth outlook, which is fair enough, everyone knows that if growth slows – or worse, recession returns- then it gets harder to pay your debts. As such the markets barely batted an eye lid at this news.
German bond yields rose as high as 2.26% but have since retreated to the 2.18% zone after German Chancellor Angela Merkel ruled out the prospect of jointly issued Eurobonds. However, although yields have since retreated throughout the London Session, they remain 30 basis points above the level before THAT failed auction yesterday.
So why are bond vigilantes attacking Germany – doesn’t it have some of the best debt dynamics in the Western world? Indeed it does, and we found out today that in the third quarter annualised GDP came in at 2.5%, as expected, which is comfortably above the 2% growth rate in the US.
Today’s price action suggests that the market is concerned that Germany will end up having to bailout the entire Eurozone and thus is dumping its bonds: so Germany’s refusal to support the idea of Eurobonds and the Bundesbank’s rejection of the ECB as lender of last resort is actually pushing up its own borrowing costs – talk about cutting off your nose to spite your face.
But there is also another way to look at yesterday’s auction: German bond auctions have a habit of failing, but yesterday was bad timing. As the crisis has spread to the core economies of the Eurozone this blip has taken on much greater significance. The market won’t tolerate any indiscrepancy when it comes to sovereign debt markets, especially in Europe, so even if the auction was a technical fault it has spooked the markets, hence why German debt was rising along with French, Belgian, Spanish and Italian debt.
Tomorrow could be another eventful day. Markets are thin due to Thanksgiving and it’s the end of the week, so people may try squaring up risk positions before the weekend. If there aren’t as many buyers as sellers it could be a bad day for risk.
The biggest event of the day so far was the press conference post the lunch meeting between Germany’s Angel Merkel, France’s Nicolas Sarkozy and Italy’s new PM Mario Monti. The meeting was ostensibly about Italy’s deficit reduction programme; however everyone was listening out for any sign that Germany was softening its stance regarding Eurobonds or enhancing the ECB’s role to include a lender of last resort.
In reality this conference could do very little: firstly the ECB is independent, thus any decisions to alter its role making it the currency bloc’s financial backstop would have to be decided by the Bank itself and then incur a change to the EU Treaty. Likewise, any Treaty changes need to be ratified by 10 of the 27 EU members including the UK– so the solutions to the crisis considered most likely to succeed could take some time.
However, there were some points from the conference worth mentioning: firstly, Merkel and Sarkozy, although they share differences on the role of the ECB in this crisis, both agree that changes to the EU Treaty should be made, which will foster greater fiscal union between the currency bloc. This was France bowing to German wishes for greater budgetary discipline within the member states before it even considers anything as drastic as jointly issued bonds (although Merkel reiterated her staunch opposition to Eurobonds during the press conference).
Although the actual Treaty changes weren’t specified, a time line to present the proposals were, and we could see these trickling out before the all-important next EU summit on 9th December.
The other point was that Sarkozy acknowledged that France and Germany have differing views on the role of the ECB in this crisis: with France advocating that the Bank could be a stabilising force, while Germany is concerned that printing money will lead to hyper-inflation. However, Sarkozy did say that the two leaders would try and find common ground, so today you could argue that a tiny little in-road was made on the very long journey to the ECB becoming the lender of last resort for the struggling currency bloc.
The euro had a good start to the day along with stocks and even some European bond yields had come off their highs, although Germany had bucked this trend. However, by the London close Italian bond yields were back above 7.1% and French yields were also higher. UK 10-year Gilt yields actually fell below Germany during the London session.
The rise in German Bund yields means that spreads with German bonds have fallen for both Spain and France. This would usually be considered good news except that the upward pressure on Bund yields is down to stress and fear in the markets, and actually suggests an escalation in this crisis. So once again we get through a week with good news on both a technical and fundamental basis thin on the ground.
The euro has slipped once again to its lowest level in 7 weeks. As we mentioned before, we believed that once 1.3500 was broken it was only a matter of time before EUR/USD reached the 1.3150 lows from early October. While it seems strange that the market was “disappointed” by no action from Merkozy on the ECB as lender of last resort issue since neither leader has the power to make that decision, perhaps the good start to the euro’s trading day was far stranger when the crisis is at such a critical stage.
Fitch said that it downgraded Portugal because of its worsening growth outlook, which is fair enough, everyone knows that if growth slows – or worse, recession returns- then it gets harder to pay your debts. As such the markets barely batted an eye lid at this news.
German bond yields rose as high as 2.26% but have since retreated to the 2.18% zone after German Chancellor Angela Merkel ruled out the prospect of jointly issued Eurobonds. However, although yields have since retreated throughout the London Session, they remain 30 basis points above the level before THAT failed auction yesterday.
So why are bond vigilantes attacking Germany – doesn’t it have some of the best debt dynamics in the Western world? Indeed it does, and we found out today that in the third quarter annualised GDP came in at 2.5%, as expected, which is comfortably above the 2% growth rate in the US.
Today’s price action suggests that the market is concerned that Germany will end up having to bailout the entire Eurozone and thus is dumping its bonds: so Germany’s refusal to support the idea of Eurobonds and the Bundesbank’s rejection of the ECB as lender of last resort is actually pushing up its own borrowing costs – talk about cutting off your nose to spite your face.
But there is also another way to look at yesterday’s auction: German bond auctions have a habit of failing, but yesterday was bad timing. As the crisis has spread to the core economies of the Eurozone this blip has taken on much greater significance. The market won’t tolerate any indiscrepancy when it comes to sovereign debt markets, especially in Europe, so even if the auction was a technical fault it has spooked the markets, hence why German debt was rising along with French, Belgian, Spanish and Italian debt.
Tomorrow could be another eventful day. Markets are thin due to Thanksgiving and it’s the end of the week, so people may try squaring up risk positions before the weekend. If there aren’t as many buyers as sellers it could be a bad day for risk.