Fitch emboldens the bulls

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Markets moved positively yesterday as a rating agency, for once, gave the world some good news. Fitch dampened speculation that it would be downgrading France any time soon and that they do not expect the country to be downgraded through the whole of 2012. The same can be said for Germany with comments that its AAA rating is “safe”. They did acknowledge that there are continuing pressures on the country from places such as its own banking sector and contributions to the European Financial Stability Facility. The yields on French debt remain around 50% higher than that of Germany or the UK over a similar maturity and the CDS, insurance against a sovereign default, is trading at double the premium. Clearly the market believes that more pain for France is somewhere further down the road.

That pain was not forthcoming in the data yesterday as French manufacturing performed above expectations with food industries and mining performing particularly strongly. The data series is quite volatile however and you are unable to hang your hat on one good month’s numbers.

The Austrian auction that everyone was so worried about also performed better than most had expected. The yield on the 2022 bond fell to 3.322% from the previous auction of 3.528% while bid-to-cover was decent enough and this added to the bullish sentiment in global equities with most indices in Europe over 2% higher on session.

The euro was unable to benefit however and has remained near the recent range lows with decent offers in the market possibly as a result of the upcoming merry-go-round of meetings between European leaders. Merkel met IMF Chair Christine Lagarde yesterday and today meets Mario Monti, the Italian PM, while Sarkozy today meets his former Finance Minister. The topic of conversation last night was Greece and the issue of further haircuts for Greek debt holders has become more and more pronounced in the past week or so. Some bondholders want a default so their CDS contracts trigger and they are paid the insurance amount; the ECB, EU and IMF are against this and are also, handily enough, insulated from any haircuts themselves. We’re all in this together is not just a British phrase nowadays.

The euro does look exposed at the moment, ahead of the ECB meeting tomorrow afternoon and bond auctions from both Italy and Spain in the hours beforehand. You can get all the details on the ECB and BOE from our webinar tomorrow afternoon. We will also look at how we expect sterling to trade over the coming months.

The main announcement today is the Fed’s Beige Book assessment of the financial conditions in the US over the past month. Data has been good of late but we expect the Federal Reserve to continue to remain wary of the risks to the downside. We also have UK trade balance numbers which showed a strong rebound in its previous release. That’s due at 09.30.

Lastly there is a German bond auction of 5yr debt due at 10.15; a repeat of their negative yield auction is not expected.

Indicative Rates Sell Buy
GBPEUR 1.2092 1.2121
GBPUSD 1.5459 1.5484
EURUSD 1.2767 1.2790
GBPJPY 118.87 119.14
GBPAUD 1.4982 1.5010
GBPNZD 1.9428 1.9457
GBPCAD 1.5678 1.5706
NZDUSD 0.7946 0.7967
GBPZAR 12.49 12.55
USDZAR 8.0774 8.1101
GBPPLN 5.3783 5.4155
EURJPY 98.17 98.44

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