US Bond Yields Drop

The negative sentiment from the European trade that was triggered by concerns over ECB’s increasing balance sheet, carried over to the US stock markets. The S&P 500 ended the session down 1.3%. The Asian stock markets are trading in negative territory this morning. Nikkei is down 0.7% and Hang Seng 0.9%.

US bond yields dropped as risk appetite decreased. The 10-year yields decreased 9bp and are trading at 1.93%. In FX markets EUR/USD briefly dropped below 1.29, and is trading around 1.293 this morning. This is the lowest level since January.

In the European session, most stock indices were trading in positive territory, fuelled by a very successful Italian bill auction, until shortly before closing. The yield on the EUR9bn 6-month bills auctioned at 3.25% on average. At an auction of similar maturities on 25 November the yield came out as high as 6.5%.

However, concerns over ECB’s increasing balance sheet triggered a negative change in sentiment. It is the increased lending at last week’s LTROs that has caused the ECB’s balance sheet to increase by EUR233bn to EUR2.73tn. As the information about the increased lending was revealed last week the market reaction is a little surprising.

In a session with no market moving news WSJ’s main story is an investigation based on interviews with euro area policy makers on how “Dithering at the Top Turned EU Crisis to Global Threat”. The article looks back at how indecision around summer “failing to address either the immediate concerns of investors or the fundamental weaknesses undermining the euro. The consequence was that a crisis in a few small economies turned into a threat to the survival of Europe's common currency”.

Global Daily

Italy will sell government bonds in the 3- and 10-year segments today. In
particular the short maturity should go well in line with yesterday’s t-bill auctions.The demand in shorter maturities has increased following the substantial rise of liquidity in the system after last week’s LTROs. The yield on 10-year government bonds ended yesterday’s trade at 6.96%. Italy is expected to issue around EUR440bn of government bonds and t-bills in 2012. For more detail see WSJ and Government Bonds Weekly, published on 23 December 2011.

On the data front, the two main releases in the European session are euro area M3 money supply and German inflation data. Euro area inflation data are expected to start edging downwards and the German data will give us the first indication. In the US focus will be on whether initial jobless claims will continue to be below 370K, as it has been over the past two weeks. Also Chicago PMI and pending home sales will attract attention today.

In Scandinavia the only important release today is Swedish trade data.