Periphery Bonds Bounce Back

Following Tuesday’s falls we saw somewhat of a bounce backyesterday although the positivity was not enough to wipe out the earlier losses. Policy makers in Europe were quick to calm markets with one member of the ECB suggesting that the central bank may buy Spanish debt through its SMP programme like it did with Italian paper. This bolstered Italian and Spanish equities in particular and while they also saw their bond yields come lower but, once again, they remain at significantly elevated levels (5.5% and 5.85% respectively).

The closely watched bond auctions had their impact usurped by the comments suggesting central bank support for Spanish assets although both auctions were disappointing. The yields on Italian 1 year money doubled to 2.84% from the previous auction in Italy while Germany’s auction was “technically uncovered” i.e. not enough buyers were found for their debt.

This is fortunately not to do with any doubts over the stability or health of the German financial system and more to do with the pricing. Investors were unwilling to pump money into a 10 year bond paying a yield of only 1.7% while the risk of the Eurozone remains.

Italy is active in the auction markets once again today and once again will be closely followed.

The euro has not been a significant mover on these flows however with crosses against the single currency remaining range-bound since we returned from the long weekend. The main losers yesterday were the typical ‘haven’ currencies of JPY and USD but the euro does remain vulnerable in the short term and, as we said yesterday, is only 30bps away from recent highs in GBPEUR terms.

The impact of the Indonesian earthquake was slight yesterday. Traders, upon seeing the magnitude of the event, had been fearful that we may have been in for a similar day as the day of last year’s quake off the Japanese coast. Thankfully these fears proved to be ill-founded and the market, and human, cost seems to be little.

We finally get some economic news today following a couple of sessions fuelled by price action as opposed to fundamental data. The most closely watched number will the US initial jobless claims figure due at 13.30 which is expected to show a continuing trend of deterioration in the number of people claiming unemployment benefits stateside. This will directly link into the market’s mind-set as to whether further asset purchases are likely in the future. The market is looking for 355k.

We also have details of the UK trade balance at 09.30 and Eurozone industrial production due at 10.00.