German bund auction not as it seems

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Investors looking for something to scare themselves with as to the state of the Eurozone found something new yesterday. We’ve heard about poor debt auctions from Greece, Spain and Italy in the past few months but never feared for one from Germany. An auction of 10yr debt yesterday by the Bundesbank was technically uncovered i.e. the amount that the bank wanted to sell was not fulfilled, a sign that demand for German assets is not there. There was a great deal of wailing and doomsday-ish tripe that came out in the aftermath but we are more circumspect. Yes, the auction was undersubscribed but I doubt this is a new chapter in the European debt crisis and more of a footnote. The market is simply saying that German debt is too expensive at the moment and they want something higher than 2% on 10yr money for something tied to the Eurozone. What it does show is that if the market is not willing to buy expensive German debt then what hope does the European Financial Stability Facility have for selling its paper? And if investors are deliberately shirking German paper for other safe havens or cash then what about it? It’s called a diverse portfolio. If investors want something to panic over they should remain focused on Spain, Italy, France and Belgium.

And with that data from the EU has remained poor with yesterday’s industrial new orders number was no exception. Orders fell by 6.4% in September and are forecast to remain weak while it was confirmed that both services and manufacturing PMIs, important indicators for Q4, were lower than 50.0 (47.8 and 46.4 respectively) and
therefore a contraction in the Eurozone through the ends.

All this together moved the euro and risky assets lower once again with equities losing for their 8th day in a row. As seems the norm now, and nobody should be surprised around this, flows were into the US dollar and the Japanese yen. Both GBPUSD and EURUSD hit fresh 7 week lows on these averse moves.

We are seeing a little bit of a rally so far this morning with German GDP numbers getting the plaudits for that.
Consumer and company spending were the main drivers with private consumption jumping 0.8% between the 2nd and 3rd quarters. This is despite the poor consumer confidence numbers that have been seen for the past
few months. Exports remained high and given the propensity for German exports to remain in the Eurozone this may be a harbinger further down the line. Staying on Germany we have a key indicator of business sentiment due at 9am this morning. The IFO survey is expected to fall to a 20 month low this morning as the continued pressure and uncertainty hurts businesses in Germany.

Europe is not the only focus today with Japan thrown kicking and screaming back into the limelight. The ratings agency Standard and Poor’s released a paper overnight saying that Noda’s administration has made little if no progress in reducing the public debt figures in Japan. This is not a surprise really given the massive debt levels
(debt to GDP ratios north of 200%) and the fact that the negative outlook has been in force since April.

It is Thanksgiving in the US and therefore liquidity is likely to be poor throughout the session and therefore
whippy moves may be seen. The main data point today is UK GDP at 09.30 which is expected to show that Q3 GDP has seen a confirmation at 0.5%.

Indicative Rates Sell Buy
GBPEUR 1.1596 1.1622
GBPUSD 1.5529 1.5553
EURUSD 1.3373 1.3397
GBPJPY 119.76 120.04
GBPAUD 1.5927 1.5954
GBPNZD 2.0875 2.0906
GBPCAD 1.6236 1.6264
NZDUSD 0.7426 0.7445
GBPZAR 13.21 13.26
USDZAR 8.5005 8.5352
GBPPLN 5.1875 5.2244
EURJPY 103.11 103.36

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