Follow the yields. That is providing the conviction for most EUR currency positions. Spain has again managed to garner most of the market attention this morning as their 10-year government bond yields hovered close to +7% danger levels shortly before Madrid went to market seeking funds over two to seven years. It looks like the true nature of the Spanish bargain is now clear, the government has adopted a massive austerity package to escape an official bailout. In reality this is bringing no reward and which, unfortunately, is no market surprise. The IMF is now forecasting that Spain will remain in recession next year and a further heavy dose of austerity measures will not be helping. The lack of an unclear roadmap on how to drag Spain out of its four year recession may mean a large sovereign bailout is inevitable.
The Spanish bond auction results were close to being somewhat horrid and technically another bad result for Madrid. This resulted in borrowing costs again jumping sharply, and demand for the debt falling. However, the only glimmer of comfort is that Madrid did manage to raise a total of +€2.9b, close to their desired maximum amount, but, the market made them pay up for it.
- 2014 bond: Yield +5.302% vs. +4.483% on June 7. Bid-to-cover 1.9, vs. 4.3
- 2017 bond: Yield +6.543% vs. +6.195% on June 21. Bid-to-cover 2.1, vs. 3.4
- 2019 bond: Yield +6.798% vs +4.899% on Feb 16. Bid-to-cover ratio of 2.9, vs 3.3
Results show that it was an expensive undertaking for the Spanish sovereign. The EUR immediate reaction was to come under pressure. Before this it had been the dollar turn to experience some weakness as the market had been pricing in the possibility of another round of QE3 in the US as the Fed acts ready to boost the US economy, if or when necessary.
The market will certainly begin to worry about the overall demand for Spanish paper. Is it beginning to collapse? If that trend starts with shorter-dated debt then this would raise the spectra of Spain losing market access. Not helping investor confidence is the waiting for the promised bank bailout to be completed. When completed, there is no guarantee that Spain itself won’t need a bailout at some stage and one of the big picture reasons why the EUR remains on tender hooks for now.
Growth in UK sales disappointed last month. Weather is apparently the sole culprit. The washout summer weather is doing little to boost traditional summer sales, even the Queen’s jubilee celebrations has provided little assistance to the months final tally. June sales volume increased +0.1%, much slower than the previous month’s +1.5% growth rate. Despite this result, sterling is hanging in as the market waits for this mornings Philly Fed survey. It’s the US highlight of the day, and the markets are expecting an improvement. With the market positioned long USD and short risk, a stronger than consensus reading could be beneficial for risk appetite, so the market can expect some further position scrambling.
While Spain suffered in the bond markets, France managed to sell sovereign debt at remarkably low cost. French treasury happened to sell +€4.5b of five-year debt at an average yield of just +0.86%, a record low. This is a solid result, and a sign that France, despite it’s economic challenges, is still considered a contender for safe haven activity. All this fuss has pushed the EUR higher and through the psychological 1.23 level. The market is now focusing on the weaker EUR stop losses top side. Despite the horrid Spanish results, the EUR’s first line of support around 1.2250-60 remains intact. With prices setting a higher daily low for a third consecutive session yesterday is providing the opportunity to use dips to set long fresh single unit trades in the short term.
Other Links:
Core Yield Hurts EUR
