Gentleman (do not) prefer bonds

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It was another “Groundhog Day” in financial markets yesterday as equities were pulled lower by the on-going uncertainty in European markets with currencies remaining volatile within their recent ranges. It looks like more of the same today with the main bourses in Europe expected to open trading over a per cent lower and FX seeing little interest in the opening exchanges.

The Spanish debt auction that the market decided to focus upon will go down as the auction that kicked Spain’s funding issues harshly into the limelight. Spain sold EUR3.56bn in 10yr bonds at 6.975%, a euro-era high and obviously as close to 7% as you can get without actually trading the handle. The previous auction on October 20th went for an average yield of 5.433% with demand at 1.76. So we can see that, like everywhere apart from Germany in the EU, yields are rising and demand is falling. Spain is a difficult economy to call as, like Italy, there is a large cash market in country. In many ways the fundamentals are worse; a very large and over indebted banking sector, probably further falls in the housing markets and a terrible unemployment situation. It seems that the reasons why Italy was targeted first are two-fold: firstly the size of their debt markets (3rd largest in the world) and the dire political situation.

In any case it is likely that champagne will have to stay in the bottle at the Party Popular HQ when they eventually win the Spanish general election. Rajoy however needs to come out and say what he is going to do for the Spanish economy (he has been woefully quiet on the matter so far) and he needs to do it quickly otherwise markets will get increasingly antsy. The ECB was active in the markets for Italian and Spanish debt, which helped pull yields down from the record levels.

We, alongside everybody else, were left slightly mystified by the rise in UK retail sales in October given the signals from other measures of consumer sentiment that show people tightening their purse strings. Reports from High St firms is that most of the 0.6% increase was as a result of pre-Christmas sales and promotions within stores. The pull of this consumer demand forward, it stands to reason, may leave a gap come Dec/Jan unless margins are once again slashed so as to tempt people through the door. Sterling rallied slightly on the number but has remained in its predetermined range of 1.1640 to 1.1730 against the euro.

It is only second-tier data in the calendar for today so once again the market will mainly be looking at the European debt situation closer than anything else. We seem to have drifted back into Europe being a talking shop with very little actual action taking place. Liquidity, solvency and confidence issues need to be addressed before we can get down to structural reforms; why focus on the last hurdle of the race when it’s the one right in front of you that’s going to trip you up.

Indicative Rates Sell Buy
GBPEUR 1.1673 1.1700
GBPUSD 1.5779 1.5804
EURUSD 1.3501 1.3523
GBPJPY 121.12 121.41
GBPAUD 1.5787 1.5811
GBPNZD 2.0802 2.0832
GBPCAD 1.6233 1.6263
NZDUSD 0.7575 0.7594
GBPZAR 12.93 12.98
USDZAR 8.1922 8.2270
GBPPLN 5.1618 5.1918
EURJPY 103.65 103.91

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