Market Commentary: Yields for Italy, Spain, Portugal and Greece diverge sharply from core Euro area

In Europe, markets definitely experienced a risk-off day, with losses taken over high yield, equities and peripherals. In what was quite a change from last months’ trends, the yields for Italy, Spain, Portugal and, more significantly, Greece, diverged sharply from those of the core Euro Area countries.

What is more, the yield on 10-year Greek sovereign paper surged above 8%, marking a significant turn from the tightening that was brought about by ECB’s accommodative efforts and hopes for sovereign bonds buying program. Concurrently, the sharp move in prices should serve to delay the country’s hope of returning to markets and leaving the IMF program earlier than scheduled.

On a similar note, we saw Spain failing to attract sufficient investors in a bond auction where it was looking to raise EUR3.5 billon but was forced to settle for EUR3.2 billion. To add to the downward risk, Italy came under the spotlight after passing some fiscal measures that are at odds with the European Union rules.

On a more positive note, Greek bonds might find some technical support in the ECB decision to lower the haircuts applicable to such assets when these are used as collateral; although the decision was disclosed yesterday, this apparently “should by no means be viewed as an ad-hoc reaction to the most-recent market stress.”

The  markets pared however part of the losses after St. Louis Federal Reserve Bank President expressed his confidence in economic fundamentals but voiced his concerns with respect to dwindling inflation expectations and suggested that Fed should consider delaying the end of the QE (i.e. asset buying program which has been brought down to USD15 billion per month from USD85 billion).

In the aftermath of this statement, the US equities recovered most of the losses and the 10 year US Treasury yield consolidated above 2.1% whereas earlier it had been volatile and for brief periods it dipped below 2%. We thus saw once again how critical Fed guidance has become for markets and what the move towards qualitative/soft targets implies for volatility. Indeed, he acknowledged that “markets crave reassurance from the chair even if not too much has happened since the last meeting”.

On a similar note, the same Fed representative commented yesterday that “maybe we should invoke the data dependent clause on the tapering” while adding that “the last jobs report was quite strong”. Similarly, Philadelphia Fed’s head said yesterday that “I want the flexibility to move when the data tell me it’s appropriate, and I think our language needs to be more accurate about the data.”

The data published yesterday was, with the exception of homebuilder’s confidence, stronger than expected but since it followed some disappointing figures earlier this week and came after warnings about contagion effects, it failed to lift the markets which are struggling to anticipate how these will interact to impact the Fed’s stance or tone.

The weekly unemployment claims turned out to be the lowest since April 2000 and surprising analysts by a significant margin although there are on the economic calendar was the industrial production, which posted a speculations that data might have been affected by the Columbus Day holiday. Another green spot monthly growth of 1% against expectations for 0.4%; the manufacturing component was up by 0.5% whereas the auto production fell. 

In contrast, the homebuilders’ survey showed that these are less optimistic than expected or than they were a month ago. Today, additional housing data is due – housing starts and building permits.

Among the events scheduled for today, we highlight Yellen’s speech and consumer sentiment data, both of which can significantly impact the markets at the current juncture. In Europe, investors will have to digest the latest car sales figures (which showed growth of 6.1%) and the speeches of some ECB’s representatives – Weidmann and Constancio.

This article was issued by Calamatta Cuschieri, visit www.cc.com.mt for more information.

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