Looking at the movements in yesterday’s markets you’d have been hard-pressed to guess that the Spanish banking system received a bail out of up to EUR 100bn only a couple of days ago. Spanish bond yields hit euro-era highs of near 7% while Italy’s also continued on a rapidly increasing path. The structure of this bailout, or Spailout as some people are calling it, has transferred the risk of the banking sector on to the balance sheet of the sovereign. In doing so, it has given with one hand and taken with the other and therefore, the market has remained relatively unimpressed.
It has become clear that the market is looking for one of two things; complete fiscal integration, which we have long argued is the only viable long-term solution to these issues, or a complete disintegration of the Eurozone. There was further chatter from official quarters about Eurozone bonds although this is yet another plan that the Germans stand against and therefore is a non-starter at the moment.
Issues from Greece were largely quiet yesterday although there have been numerous persistent rumours that capital flight from Greece has stepped up a gear in the past few days from an average of EUR100mio to around five times that. As we stated yesterday, the world is still in the dark as to the voting intentions of the Greek public although the extremists (Syriza and Golden Dawn) seem to be the ones shouting the loudest at the moment. All will become clear on Sunday.
Two bond auctions today will be able to give us an interesting view of how far the contagion has reached in the past 48hrs from the lacklustre bailout of the Spanish banking system. Firstly, we have an auction of 1yr money from Italy at 10am. The pressure on peripheral sovereigns and the belief that something like a bailout will be needed has increased the yields at the near end of things a lot faster than that at the far end leading to increased pressure in the short term. A significant increase in yield at this bill auction today will further increase chatter around an Italian rescue package.
The German 10yr auction at 10.30 will also be interesting to see if the Bundesbank has to buy up more of its issuance than normal on increased fears that even German bonds may show weakness in the future. Last year we saw the Bundesbank have to step in to prevent a failed sale of 10yr money because demand was too low; investors weren’t willing to take such a low return on their money for something tied to the Eurozone. Given bond market movements in the past week or so, a similar result could be forthcoming.
The data picture improves a little today with German CPI and US retail sales the key items. The ECB failed to cut interest rates at its previous meeting, and German CPI may be able to show us whether shifting our expectations to next month will be a thankless task or not. Retail sales from the US are expected to be lower and combined with an expected slip in inflation tomorrow and comments from some Federal Reserve officials, the probability of some form of additional easing from this month’s meeting increases. The current plan in the US, so-called “Operation Twist”, expires in just over 2 weeks.
Indicative Rates Sell Buy
GBPEUR 1.2413 1.2442
GBPUSD 1.5538 1.5562
EURUSD 1.2501 1.2524
GBPJPY 123.61 123.89
GBPAUD 1.5598 1.5625
GBPNZD 1.9952 1.9980
GBPCAD 1.5957 1.5986
NZDUSD 0.7779 0.7801
GBPZAR 13.00 13.05
USDZAR 8.3570 8.4017
GBPPLN 5.3583 5.3878
EURJPY 99.47 99.73
Please note these rates are “interbank” rates ie they indicate where the market is currently trading and are not indicative of the rates offered Rates are dependent on amount transacted. It is important to remember that foreign exchange rates fluctuate all the time. The rate you will receive will depend on the amount and currency you require.
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