Safest of Bunds Sickens EUR

There is little to be thankful for in these kinda markets. Risk aversion trading strategies are again preferred this morning. The EUR trades at a new six-week low, dragged to these levels after a disappointing 10-year bund auction that was technically “uncovered”. This illustrates the nervousness amongst investors when they do not have appetite for the safest of ‘bunds’. Only Eur3.9b total bids were received for the Eur6b January 2022 offering. That was well below the average the +6.5b recorded in the last three 10-year sales. It will now be hard to claim “Bunds” invulnerability after such a poor performance. Contagion to the core!

The sell off in risk is again boosting the dollar and yen. A much larger than seasonal decline in the flash Chinese PMI overnight and reports that bailout negotiations for a French bank have broken down have seen a return of risk aversion. This news flow reversed earlier more positive sentiment from the IMF’s announcement that it would make its precautionary liquidity facilities available to Euro area countries. The USD has also benefited from the lack of any clear signs of impending QE in the FOMC minutes released yesterday.

Talking of Banks, the BoE held off buying more bonds this month because policy makers saw little merit to “fine tuning” their stimulus program. The nine members voted unanimously to keep key interest rates unchanged at +0.5% and the size of its asset purchase program at +275b. They believe it wise to continue with the existing program and prefer to gather information about its effects rather than “sanction another extension”. The market is betting on an extension in the Q1.

Policy members are again defending Austrian Banks this morning. Fears that their financial system is exposed to central and eastern Europe so deeply could harm the country’s AAA credit rating are supposedly “wildly exaggerated”. This is not the first time that a bored capital market has tried to enter the Euro back door to get to the “core”. ECB governing council member, Nowotny, who also happens to be head of the Austrian Central Bank, is championing their cause.

What is clear about this mornings’ actions is that investors are becoming increasingly fearful about the fundamental nature of this Euro crisis. It is now beginning to infiltrate the true ‘core”, Germany, the atlas of Europe. Greece is endangering Germany’s reputation. Next its either the Greeks conforming to the Euro way or there is the door.

Before the US sits down to give thanks, the market is anticipating a pullback in their durable goods print this morning. Ex-volatility non-defense capital goods, analysts expect it to have fallen-l%, m/m, after gaining +2.9% in September, with weekly jobless claims pushing up a tad.

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FX eyes Euro Yields for direction