Refunding Fears Take Toll on Europe

One of the key factors behind the poor sentiment toward the euro, which was pressed to new 13 month lows in Europe today, is the challenge posed by the sovereign and bank refunding needed this year, while rating downgrades loom around the corner. Euro zone sovereigns have an estimated 800 bln euros of debt servicing and spending to fund this year, while the banks have a little bit more.

On the sovereign side, the French bond auction today seemed to adequate; the funds raised were in the upper end of the 7-8 bln euro sought and yields were mostly lower.  Bid-covers were not quite as good as recent auctions, but none were uncovered.  Italy's bond sales next week may be a more significant challenge. Spain also will sell bonds next week.   

Yet the January outlook in general is aided by the fact that coupon payments and maturing issues of an estimated 82 bln euros (~55 bln in maturing bonds and ~27 bln in coupon payments) nearly covers the 85 bln sovereign issuance.  In February, the anticipated new supply may be 25-30 bln more than resumptions and coupon payments. European banks face an estimated 300 bln euros of maturing senior debt and covered bonds in Q1, the highest quarterly amount here in 2012. This does not include the new capital that needs to be raised under the EBA findings.

The rights offering by Italy's largest bank 43% below the closing price on Jan 3 has disrupted the trading of bank shares in general in Italy. The 43% "discount" compares with a 30% discount last year when one of Germany's largest banks had  a rights offering. The results of credit reviews of both sovereigns and banks is anticipated any day and this too hangs over the market like a sword of Democles.

On a somewhat more constructive note, the UK services CIPS completed the trifecta--all three purchasing managers surveys were better than expected and the service sector reading was the best since last July. Nevertheless, it does not change the outlook for the UK economy much.  It is stagnating or worse. Sterling appeared to be dragged down by the falling euro. Sterling is still trading within Tuesday's trading range (for the second consecutive session) of $1.5502-$1.5670. Separately, and as noted previously, sterling and gilts have been thought to be in good demand from reserve managers and as a relative safe haven for investment funds.

Meanwhile, the Hungarian forint remains in the spotlight.  It failed to raise as much as it had expected in a bill auction--even Greece's bill auctions have been covered. Hungarian bonds remain under pressure and in the CDS market, the cost of insuring Hungary is 750 bp compared with 712 in Ireland, for example. The pressure on Hungary appears to be spilling over and impact Austria, where the banks have deep exposure to Hungary.

Austrian bonds are under a bit of pressure in the the CDS market, Austrian insurance is rising 14 bp, the most among the developed countries today. There are rumors that Hungarian central bank will hike 150-200 bp in an emergency measure ahead of the Jan 23 official rate decision. Previously, the market had been looking for a 50 bp hike then.