Spanish debt auction puts bounce in the dead cat

More John J Hardy, yesterday15 December 2011 Non-Independent Investment Research A strong Spanish debt auction today finally put a bid in the EURUSD after the key pair drooped below 1.30 of late. Meanwhile, the SNB disappoints those looking for a rise in the EURCHF floor.

After three days of bloodletting for risk on the re-acceleration of the EU crisis, the markets are trying to take a breather today, driven perhaps by less catastrophic than feared data and a strong Spanish bond auction. The HSBC flash PMI in China improved, though still came in just below 50, and the European flash PMI’s for December were slightly better than November levels, if still a bit depressed. In other words, expectations may have gotten so bad here – particularly for Europe – that only truly catastrophic data has the power to pile on the pessimism.

 While the latest political noise out of Europe continues to strip away the last shreds of confidence that any solution will ever be found that keeps the EU together, many of the sovereign- and bank liquidity indicators bounced in today’s early trade after a scary semi-meltdown yesterday. This and the tightening  sovereign debt spreads in general today were driven by a very successful auction of Spanish debt – as Spain managed to sell twice as many bonds as anticipated at its auction today. Some of that demand may be due to the anticipated boost in liquidity from the ECB’s most recent measures , which could allow Spanish and other banks to lock in fat spreads on LTRO and other borrowings versus investment in sovereign debt – assuming that what looks well on paper, ends well in reality.

SNBDespite evidence of a cratering Swiss economy and deflationary inflation readings of late, the SNB today dashed market expectations that a new rise in the EURCHF floor and/or other measures would be announced today and CHF was bid, driving EURCHF back below 1.2300. Still, the language on the SNB’s intent was more than clear, as Hildebrand stated that the SNB was ready to act at any time and that its current strength still presents a strong risk to the Swiss economy. The inflation forecast for 2012 was kept at an outright negative -0.3% and the forecast for 2013 was lowered slightly. The Citigroup economic data surprise index for Switzerland is at an astounding -127, the lowest since early 2009. It is clear the SNB will move again, but it seems to want to keep the market guessing on timing, a tactic that may actually enhance the eventual impact of a move.

Where we stand and looking aheadToday we’re finally finding a bit of stabilization in risk appetite after a couple of rather heady days of declines triggered partially by the petulant reaction to the FOMC meeting not producing any QE3 guidance (looks like a rather thin excuse as there should hardly have been any dramatic expectations heading into that meeting – sometimes, these event risks merely “dam up” market action due to those who would simply like to wait for event risks like this to be out of the way before putting on risk.), but also by the aggravated return of EU worries.

With US bond auctions this week showing a more-than-firm bid for US government paper all the way to the longest end of the curve, it appears the market is raising its macro bet on a deflationary trend, the Bernanke Fed notwithstanding. US 30-year rates below 3.0% again are a very strong expression of caution. Commodities are also beginning to look more than a bit frayed around the edges, as the consensus wisdom of printing-money-means-buy-hard-assets is being sorely tested at the moment. Even crude oil finally managed to suffer a severe correction yesterday for the first time in months. Meanwhile, as one would expect in such circumstances, the USD has broken new ground to the upside in recent days. On the other hand, equities have hardly corrected and an equity market rout would be the final straw for markets/risk appetite here – and in the G10 currencies, could finally serve to administer a more definitive knock-out blow to the Aussie. On that front, it is interesting to note that the US S&P500 crossed and closed below the 50-day moving average again before today’s enthusiastic response to the Spanish debt auction. 

Ahead of the US equity market open, risk appetite is getting a further boost from the latest figures out of the US to roll in better than expected, with weekly jobless claims registering the lowest reading since pre-Lehman days and the Empire Manufacturing survey showing a solid gain. Watch for the Philly Fed out shortly. Tomorrow’s US November CPI release will be interesting as we look for a possible end to the rising trend in core prices on year-on-year comparisons. The year-on-year core CPI has marched higher for 12 consecutive months in a row and in Oct. sat at a near 3-year high of 2.1%.

Let’s also watch how EURUSD behaves here around the 1.30 level as we are entering the final trading days of the year. If we manage to avoid a dramatic move in underlying fundamentals and liquidity indicators, we could see a chop-fest for the next couple of weeks. But if the Spanish auction merely proves a distraction that is not indicative of improving confidence in the near term liquidity, then the latest directional move in risk could quickly extend. 

Stay careful out there.

Economic Data Highlights China Dec. HSBC Flash Manufacturing PMI out at 49.0 vs. 47.7 in Nov. Switzerland Q3 Industrial Production out at -1.4% QoQ and -1.4% YoY vs. -0.9%/0.0% expected, respectively and vs.