Friday, July 20, 2012

Economic Insights


Economic Insights


Weak demand in Madrid’s auction, borrowing cost surges

Spain sold EUR 2.98 billion of 2-year and 5-year notes yesterday. Cost surges because the demand for the notes has weakened significantly compared with one month ago.
For the 2-year notes, yield has surged to 5.204% compared with 4.335% last month and the bid to cover ratio has dropped to 1.9X from previous the 4.26X. For the 5-year notes, average yield rose to 6.459% from the previous 6.072 and the bid to cover ratio has dropped to 2.06 from 3.44 in June.
The overall situations were disappointing although it has met the sales target, and it shows that the domestic commercial banks, who are the main buyers as usual, have lost their confidence on the country’s sovereigns. After the action, Spanish 10-year bond yield re-entered the 7% above crisis level, and the bloc currency plunged against its major counterparties amid less fundamentals have improved after a few strategies were proposed.
One negative new event in the Crisis Monitor Model is that France has become another sweet spot for those investors who want to shift their portfolio into the so-called safe haven assets. French 10-year sovereign yield has hit a record low below 2.10%.
Source: Reuters
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If you just take a glance at the France’s fundamentals, they do not consider France as “healthy”. The economy only grew 0.1% in the past 12 months, and debt to Gross Domestic Product (GDP) ratio is expected to rise to 90.8% next year compared with 85.8% last year, according to the International Monetary Fund (IMF). From the chart below, you can see the economic growth in France is still trending lower.
Source: Reuters
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From the country’s labour market’s side, high labour cost and high unemployment signalled weaker competitiveness compared with Germany, Finland and Netherland.
Source: Eurostat, Bloomberg
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 France’s unemployment rate is only 1% lower than the entire Euro Zone’s unemployment rate at 11.1%.
Source: Reuters
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So, the low yield in France is similar to what is happening in Germany, Holland and some other Nordic countries because it’s all about safety, safety and safety. You can see the French-German 10-year bond spread has been narrowing and the Spanish-French 10 year bond spread keeps widening. In the psychological point of view, investors who keep finding different kinds of safe haven assets suggested the deteriorating sentiment and confidence in Europe which is not improving.
The yield curve graph and credit spread implied the overall negative outlook from the investors.
Source: Bloomberg
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From the graph, it shows that the demand for Spanish notes has deteriorated because the curve has shifted upward, the demand for German and French notes have strengthened because the curve has shifted downward.
Source: Bloomberg
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Source: Bloomberg
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I named the model of “shorting the EUR versus the commodity currencies” based on the growth divergence in the different countries since 3 weeks ago, and I remain my view at this time.
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Source: Bloomberg
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Demand for US Treasury Inflation Protected Securities (TIPS) rises, US dollar gain capped
The US Treasury sold USD15 billion Treasury Inflation Protected Securities (TIPS) yesterday at a record negative yield when traders added in speculation that the Federal Reserve (Fed) is going to inject more liquidity to spur the economy. The borrowing cost was -0.637, the 4th consecutive auction that investors are willing to pay for the debtors for holding on to their principals.
Source: Bloomberg
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Fed Chairman Ben Bernanke expressed the view in the congressional testimony that the current major concern was the struggling high unemployment and growth instead of inflation, thus traders priced in quantitative easing (QE3) further in the inflation protection index and bet for more stimulus from Fed, which may be just a matter of time. This is a typical “Moral Hazard”, and lesser inflation pressure recently support the “pro-stimulus” further that limited the US dollar’s appreciation against its major counterparties even in an inverse risk on scenario.
Little impact from US Initial Jobless Claims due to auto-plant layoff
The US weekly jobless claims rose to 386,000 from previous 352,000, increased by 34,000. However it will be tough to judge a real picture at this time because an auto-plant layoff usually occurs at this period. Many major auto companies will shut down a number of their plants to meet increased demand, thus some analysts are considering seeking more clues in August to gather evidence to see if it is just the auto-sector that drives the claims higher.


Disclaimer The analysis we provide is based on the average estimate of price movements in one day. Does not guarantee what we deliver is actually a proper and correct. Everything that happens in the decisions you make on your trading transaction is to be Your responsibilities.
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