Sentiment Deteriorates Further After Tepid Spanish and French Auction Results

  • EuroStoxx 600 is down over 1%, EZ bond yields mostly higher after Spanish and French bond auctions
  • Financial market stress (banking and credit) continues to intensify amid lack of progress on debt crisis
  • UK October retail sales saw unexpected strength; Singapore’s Oct. non-oil domestic exports plunged

The dollar moved higher in the European session against most of the majors and EMs after Spanish bond yields have risen to record high levels, with the 10-year up 34bps to 6.699%. The highlight of the European session were the auctions on Spain and France, both of which showed a rise in refinancing costs and waning demand, though the French auction was the better received of the two. European shares are down for the third day in four, with banks shares currently down 2%. Adding to the banking stress was news of a rating cut by Moody’s to 10 German government-owned banking institutions. US S&P futures point to a modest decline.

Today, the highlight of the European session (which is likely to set the tone in the North American session) are the results of this morning’s French and Spanish bond auctions. Indeed, financial market stress has only intensified amid the uncertainty of the EZ sovereign crisis and the lack of progress in resolving the crisis, which in turn has led to sharp rise in interbank borrowing costs. Euro-dollar basis swaps are now at levels not seen since late 2008, though still 80bps from its high amid the Lehman crisis. The 3-month libor-OIS spread in the US and UK also show signs of bank funding and credit market pressures. While central banks have tried to limit the tightening of financial conditions, increasing financial stress has led for the most part to deterioration in consumer and business confidence and to noticeable signs of economic weakness – especially in the euro zone and the UK. The mediocre auction results in Spain and France have only added to stresses in the euro zone bond market. Not surprisingly, Spain saw a decline in demand and a rise in borrowing costs, which will only add to calls to the ECB to extend its bond purchases as the 10-year Spanish yields climbs towards 7%. Nevertheless, the fact that Spain did not sell as much as wanted is not really problematic from a funding standpoint. Spain has no bond redemptions remaining this year and these sales are to set a new benchmark 10 year. From here, we could see the euro consolidate a bit going into the weekend given recent positioning trends, with resistance seen near 1.355. We continue to expect that a downside break of 1.34 open up a move to 1.315.

UK October retail sales came in much better than expected, with the headline rising 0.6% m/m against the consensus forecasts of -0.3% m/m. In year-on-year terms, volumes growth registered a 0.9% pace of growth, after a September reading which was revised down marginally from 0.4% y/y to 0.3% y/y. The ONS stats office, though, noted feedback from retailers that early Christmas buying, driven by promotions and pre-Christmas sales, boosted sale volumes. There has also been a supermarket price war afoot, which helped to propel food stores to the first year on year sales increase since April. Altogether, this suggests the October strength of sales is likely to prove temporary. With average wage increases continuing to lag inflation significantly, the robust September and October data are unlikely to mark the start of an up-trend. In any event, we expect sterling to mirror the moves in the euro and as a result could see some consolidation in currency ahead of the weekend, with a move towards 1.585-1.59 likely.

Singapore October non-oil domestic exports (NoDX) fell -5.9% m/m SA vs. -9.3% m/m in September, and -16.2% y/y vs. -4.6% y/y in September. Electronics exports at -31.2% y/y declined again following the 14% drop in September, while pharmaceuticals rose 7.8% y/y. Overall, export performance so far this year has been quite weak and well below recent historic averages, with Singapore’s exports underperforming some of its regional peers, such as Indonesia – whose exports surged 46% y/y in September. In fact, only the Philippines registered a similar magnitude of export decline as Singapore, with exports dropping 27.4% yoy in September, driven by the sharp drop in electronics. As a result the weakness is external demand is likely to suggest that Q4 GDP growth is likely to moderate. While the SGD is thought by some observers to be a regional safe haven, we think the SGD will remain under pressure until the situation in Europe stabilizes. It may outperform in this environment, but will clearly weaken along with the rest of EM. Near-term target is the 1.32 high for USD/SGD from October.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More