More John J Hardy, 01 December 201101 December 2011 Non-Independent Investment Research Yesterday’s announcement continues to have the “desired effect” as it was made just in time for the market to gain a bit of confidence for today’s French and Spanish bond auctions. But there is always a “but”.
Before we get underway today, please read our Chief Economist Steen Jakobsen’s take on yesterday’s global coordinated central bank action on USD swap lines: Are markets celebrating an engine failure? The metaphor of a transatlantic flight losing most of its engines is a great one for what is transpiring here.
Yesterday’s coordinated move to ease USD funding was made just ahead of today’s French and Spanish debt auctions, which went off exceedingly well given that risk spreads were in full tightening mode on the day. Spain auctioned off its full allotment of EUR 3.75 billion of 3- to 5-year bonds and yields fell dramatically from recent highs as demand was almost three times supply. The French auction of 6- to 30-year debt went off very well, too, with the absolute yield on the 10-year actually marginally lower (at 3.18%) than at the previous auction on Nov. 3 when the yield was 3.22%. Today’s action, in fact, brought the French-German yield spread for 10-year debt all the way back inside 90 bps briefly today, the tightest it has been since late October.
Also pulling EU related risk spreads a bit tighter were comments from the ECB’s Draghi, who made noises on the prospects for an expanded ECB role, “provided that Euro-area governments were to commit to a new fiscal pact.” He did indicate, however, that purchases are “limited” otherwise for now. It was actually a rather odd statement: it points out that the ECB is handcuffed for now and can’t monetize like the other G4 banks do, even while suggesting that things might be otherwise (which they aren’t, which is the whole point and reason for extreme caution in biting on the bait that set off yesterday’s risk-buying explosion).
We also got confirmation that a new government coalition will now be formed in Belgium after 536 days without a government, though we can all wonder how effective a six-party coalition will be as it attempts to consolidate the nation’s budget.
Global PMI Day
Meanwhile, back in the real economy, we have global PMI’s looking anaemic indeed around much of the world, with the European ones showing further signs of deceleration. The flash Euro Zone and German PMI’s (at 46.4 and 47.9, respectively) from earlier this month were confirmed today, but we also saw ugly surprises for Sweden (47.6) and particularly for Switzerland (at a puny 44.8, the worst reading since June 2009). This is a reminder of the rather gloomy economic backdrop as the market gyrates on liquidity-induced mayhem. The US PMI is up shortly, with the market definitely looking for at least a slight improvement after the regional surveys proved reasonably positive.
AUDCAD for the masses
We focus on something like AUDCAD here because it is interesting to look at fundamentals in somewhat forgotten corners of the market when everyone is trading headlines in a state of panic elsewhere. And now for the oddball cross of the day – AUDCAD, which seems to correlate rather positively with risk, which both makes sense and doesn’t.
While it makes some sense that this is the case as Australia sports the highest policy rate among the G10 currencies (making AUD the highest beta pro-risk currency), it makes little sense if we consider Australia and Canada as “satellite economies” of China and the US, respectively. After all, the Chinese economy is rapidly coming off the boil (to a sufficient degree that the PBOC has begun a new easing cycle) while the US economy has seen the best string of positive data surprises in the world by far in recent weeks. Below we look at three charts for additional perspective.
Chart: AUDCAD vs. risk (S&P 500)
AUDCAD has recently traded in lock-step with risk, but this hasn’t always been the case, as can be seen from its previous behavior.
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