1. Germany’s Poor Debt Auction Puts Pressure on Country’s Bonds
Germany today was set to auction off €6 billion in 10-year bonds. Instead it missed that target by up to 35%, selling only €3.9 billion, at a yield of 1.98%. The central bank stepped in and bought the remaining bonds, hoping to sell it over coming days in a hope that market sentiment improves. The bid-to-cover ration was a modest 1.1 if you include the central bank’s buying.
This raises serious questions for the European sovereign debt crisis because if Germany has trouble raising capital, imagine other debt auctions throughout Europe in coming months. Germany has been considered the stable rock and we have seen flows moving towards its bonds safety throughout this crisis.
In today session we saw German 10-year yields climb above 2%. At the same time we saw broad euro weakness following the auction, with the EUR/USD falling below the 1.3430 area.
2. German Manufacturing Sector Slumps, But Services Rise
Data from the German real economy was mixed as the manufacturing sector saw contraction accelerate during November while the services sector showed a surprise positive reading.
- Flash Germany Composite Output Index at 50.3 (50.3 in October), unchanged.
- Flash Germany Services Activity Index at 51.4 (50.6 in October), 4-month high.
- Flash Germany Manufacturing PMI at 47.9 (49.1 in October), 28-month low.
- Flash Germany Manufacturing Output Index at 48.3 (49.7 in October), 29-month low.
From Markit: “November data indicated a reduction of new business intakes across the German private sector for the fourth consecutive month. Manufacturers reported a much steeper drop in new work than service providers, and the rate of contraction in the sector was the fastest for two-and-a-half years.
Manufacturers also pointed to a steep fall in new export orders in November and, in line with the trend for overall new business volumes, the rate of decline was the sharpest since May 2009. Anecdotal evidence pointed to a broad-based slowdown in export sales, with firms commonly citing weaker demand from Western Europe, the US and Asia. Manufacturers noted that reduced confidence in the economic outlook had made clients reluctant to spend and cautious about inventory levels.”
Cooling manufacturing sector shows that both domestic and foreign demand is being affected. If German growth slows considerably, we will be seeing the ECB lowering rates from the current 1.25%. We saw manufacturing data from China show contraction in November, according to the preliminary reading from the HSBC manufacturing PMI index. If fell to 48.0 from 41.0 in October.
3. Euro-zone In Another Month of Contraction
With the prospects of the euro zone economy weakening, and a lack of a big “bazooka” type solution for the European sovereign debt crisis on hand, we should expect to see the EUR coming under further pressure.
Especially if the ECB takes interest rates down lower on the prospect of a serious recession.
At the same time we will look at the pressure on the euro periphery bond market, which is the next key headline.
4. French and Belgian Yields Sold Again on Dexia Bailout Concern
Belgian bonds came under increased pressure yesterday as efforts to form a government – in what has been a 528 day effort – faltered.
The 10-year yield on Belgian bonds rose above 5% for the first time since July 2008 yesterday, and the pressure continued in today’s trading session it moved to 5.25% and then 5.5%.
The catalyst was news that Belgium may be seeking to renegotiate the breakup plan for lender Dexia. The costs of Dexia’s guarantee are putting a strain on Belgian finances to such a degree that they are asking France can take on a bigger slice of the losses, which if done would add extra pressure on the French credit rating.
From Reuters: “Belgium is leaning on France to pay more into emergency support for failed lender Dexia, newspapers reported, spooking investors who thought a 90 billion euro ($120 billion) rescue deal only needed rubber stamping.The countries are wrangling about short-term funding guarantees meant to wean Dexia’s “bad bank” off emergency liquidity and allow it to re-enter financial markets, two Belgian newspapers reported. ”Belgium wanted Paris to guarantee more than had been agreed so far, because France can fund itself at a cheaper rate than our country,” Belgian daily De Tijd said, following a similar report in De Standaard.
In fact, it may be the straw that breaks the back of the French AAA credit rating. French 10-year yields rose to 3.63% today.
Risk Sentiment and Euro Pressured on These Developments
In summary, these developments continue to play to risk aversion themes in the markets, with extra pressure being put on the EUR on concern over Germany’s funding.
You can see the latest EUR charts here: EUR Crosses Charts & Articles Page
Without a clear solution to the euro zone sovereign debt situation, such as the ECB becoming a lender of last resort we are going to continue to see the “slow” burn to periphery yields continue. As they rise it should continue to put pressure on equities and thereby risk sentiment.
Nick Nasad
Chief Market Analyst
FXTimes
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
