Italian Auctions
Posted by jackkatz on November 29, 2011
The Conference Board tells us that we (the US consumer) are getting more confident with a rise well above expectations. I think we already knew that based on shopping data over the weekend and Cyber Monday which saw an 18% increase over last year. While confidence is still below “normal” levels we are making progress despite Europe. And over in Europe, Italy had a successful auction which markets viewed as positive even though Rome had to pay at record levels. And so for the second day in a row we are having some early holiday cheer with equities and “risk” currencies and commodities all showing gains although well below yesterday’s unabated enthusiasm.
For a second day in a row markets are in a good mood but not so much as yesterday. The EUR had continued its climb overnight to 1.3440 on what was deemed a successful Italian debt auction (more on that in a moment). But the currency has run out of steam on ECB action and is actually trading a bit lower than at this hour yesterday. Italy had a well subscribed auction selling EUR 7.5B and markets were pleased to note the strong demand after Germany struggled last week. However, yields were pretty steep with Italy forced to pay close to 8% on the 3 year compared with 4.93% a month ago and a 10 year at 7.56% vs 6.06% at the end of October. It is puzzling that such high yields were supportive of the Euro but a couple of ways of looking at this (my uneducated opinion).
The Euro fell off later in the European day after the ECB failed to collect deposits that offset its secondary market purchases. This in effect adds Euro to the market which some analysts are calling QE although it seems a bit premature to call the first shortage since April a sign of ECB QE. But QE would be seen as Euro negative as it would in theory bring down interest rates.
Europe stands on the brink of disaster and only Germany, can avert an “apocalyptic” breakup of the euro zone and the EU’s single market, Poland’s foreign minister Sikorski said. “There is nothing inevitable about Europe’s decline. But we are standing on the edge of a precipice. I demand of Germany that, for your own sake and for ours, you help it (the euro zone) survive and prosper. You know full well that nobody else can do it.” He added “I will probably be the first Polish foreign minister in history to say so but here it is: I fear German power less than I am beginning to fear German inactivity”.
Australia extended yesterday’s gains in part on a move by Fitch to give the country its highest AAA rating. The currency popped above parity rising to 1.0077 but has eased off as the government announced some spending cuts in an effort to honor its promise to return the budget to surplus by 2013. The RBA is meeting next week and futures are already pricing in a 25 point cut.
Japanese private consumption appears to be holding up with data showing a 1.9% increase in retail sales in the year to October. On the negative side, data shows the jobless rate rising to 4.5% in October from 4.1% in September.
The continuing upbeat news for the US has translated into a bounce back in consumer sentiment which rose to a 56.0 reading vs. a forecast of 44.0 and a 2 ½ year low in October. While numbers are historically weak, they are headed in the right direction. Current conditions improved and expectations rose to their highest since July.
The hold back to US is continued poor housing data as the S&P/Case Shiller composite index of 20 metro area housing prices declined .6% in September. Homes with negative equity improved a bit to 10.7Million units or 22.1%. Another 2.4Million are in the less than 5% equity range. Nevada has the highest underwater rate at a staggering 58.3% of mortgages that are “upside down.”
US bank debt ratios in October were at 7 to 1 just off a record low. The all time high was 36 to 1 at the end of 2007 and we know what happened in 2008 so current levels are seen as a positive and a sign that US banks are in a much better health. The most recent Federal Reserve Senior Loan Officer Survey also shows banks are eager to lend with the highest indicator since 1994.
Fitch yesterday revised its outlook for the US to negative citing uncertainty over growth and fiscal prospects.
