ZuluTrade Blog

European trading developed again in thin conditions due to hurricane Sandy...

Market View | Wednesday, October 31, 2012 5:22 AM GMT

 Good Morning ,


- On Tuesday, European trading developed again in very thin conditions due to hurricane Sandy. US bond markets were closed.

- German bonds corrected lower after two sessions with strong gains. In yesterday’s mild risk on session, losses for core bonds were proportionally lower than gains for equities and EUR/USD.

- This is exactly the opposite to what we saw on Monday, but again very low trading volumes might have exaggerated moves. At the end of the session, the German yield curve shifted 1.1 bps (2-yr) to 2 bps (10-yr) higher.

- Intraday, the Bund future immediately tested important resistance at 141.95.
The first test failed and we headed lower again, partly pushed down by for once non-disappointing Spanish eco data. The overnight easing by the BoJ was also supportive for risk (even though Japanese equities and USD/JPY reacted disappointed).

-  European Commission confidence data hit their lowest level since 2009, but couldn’t stimulate the Bund. French FM Moscovici talked in favor of mutual sing short-term debt, but this didn’t leave traces on markets either. In the afternoon, the Bund reached an intraday low, following Greek PM Samaras’ statement that a deal with the Troika had been reached. However, the Bund recovered from this final down leg and traded sideways into the close.

On intra-EMU bonds markets, spreads narrowed yesterday marginally. At the start of the session, Spanish Q3 GDP data (-0.3% Q/Q) were slightly better than expected. Nevertheless, the Spanish economy shrank a fifth straight quarter in a row. Later in the European session, the Italian debt agency successfully sold €7B BTP’s (see below). Italian bonds outperformed (spreads 4 to 9 bps lower across the curve).

-  In the afternoon, Greek PM Samaras issued a statement saying negotiations with the Troika are over and a deal has been reached. The draft budget for 2013 is due to go to parliament today with a vote likely due next week. FM Stournaras will update EMU Ministers of Finance during their teleconference, but it is unclear (unlikely we think) they will effectively decide on the next tranche before the vote. What is more likely, is that they give vocal support to the Greek government efforts. The Samaras statement didn’t initiate a risk rally on markets as many difficulties remain. For starters, Democratic Left (coalition partner) leader Kouvelis repeated that he doesn’t agree with the labour reforms proposed by the Troika and would vote against this in parliament. While the 16 votes of the Democratic Left are not enough to break the coalition, it further damages the credibility of the Greek government. A second, and even more important issue are worries over the sustainability of the Greek debt. All official creditors agree that someone will have to take a loss to bring it back to a reasonable level. However, for now, they are all finger pointing to each other. Today, and on the 8th and 12th of November, the Eurogroup meets to get things straight. Up until that final meeting, uncertainty and volatility will likely impact trading.

- Today, the Portuguese parliament is expected to approve next year’s budget.
However, difficulties might not yet be over as the budget could be challenged in court. Earlier this year, the constitutional court already rejected some austerity measures because they unfairly impacted civil servants.

- Today, the eco calendar remains well-filled especially in the euro zone with the first estimate of euro zone CPI inflation for October, the euro zone unemployment rate, Belgian Q3 GDP and the Chicago PMI in the US. The Eurogroup will hold a conference call on Greece and France and Germany will tap the market.


 Have a nice day !

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