Risk assets climb as eurozone fears fade

Tom Tong20/Jan/2012Currency Updates

EUR

Another round of successful eurozone government bond auctions helped risk assets maintain their upwards momentum. Borrowing costs fell at closely watched auctions of Spanish and French government bonds. The results lent support to the Euro, with the single currency touching a two-week high against the dollar. This is a 0.7% increase from the previous day. Madrid sold a total of €6.6bn of debt, much more than its target. Paris also sold well, selling €8bn of its medium-dated bonds in its first auction since its downgrade from triple A to AA+.

However, this is overcast by the ECB becoming ever increasingly involved in the Eurozone debt. The ECB provided a total of €489n in support; this was strongly utilised by Italian banks in particular such as UniCredit and Sanpaolo taking €12.5bn and €12bn respectively. Mario Draghi also expects high demand for the next round for the next round of LTROs, which will occur in the next month. Moreover, there still remains a lingering uncertainty about Greek debt restructuring and strong concerns about Portuguese assets showing increasing levels of stress. The concerns about Portugal were reflected by another jump in the country’s sovereign bonds yields and credit default swaps.

USD

There were further encouraging signs from the US banking sector as earnings from Morgan & Stanley and Bank of America exceeding Wall Street expectations. The recent run of robost US data releases also continued withe the standout feature yesterfday coming from a hefty 50,000 drop in initial jobless claims last week to 352,000, the loewst since April 2009. Signs of improvement were also mirrored in the Philadelphia Fed’s index were business activity in the mid-atlantic region gad edged up to 7.3 in January, although this is in contrast to a revied 6.8 in the previous month. Moreover, the earnings and data releases helped put US equities on course for a third successive advance, with the S&P 5000 up 0.5 per cent at close.

GBP

Sterling edged to one-week high against the dollar, with a 0.2% rise. Nonetheless, the pound dipped against a broadly stronger euro, any expected rally is likely to be limited by the ongoing crisis occurring in the Eurozone. A survey showed UK consumer confidence dropped close to its lowest level in seven years in December, adding to worries about a fragile economy and the risk of the Bank of England easing monetary policy next month. Recent weak UK data, including lower inflation numbers, have added to expectations the BoE will increase asset purchases under its quantitative easing programme next month.

Data on Wednesday showed the number of Britons out of work at its highest in more than 17 years in November, although a smaller than expected number of new benefit claims in December provided some hope the labour market may be levelling out. UK GDP figures for the fourth quarter of 2011 are due next week, with some market players bracing themselves for very low growth or even a contraction in the economy.

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Written by Tom Tong

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