Spanish bond auction goes off with mixed success as European PMI figures disappoint
21/Sep/2012 • Currency Updates•
Yesterday morning’s much anticipated Spanish bond auction sent out mixed messages to market participants regarding the state of Spain’s finances. The latest bond sale by the debt-ridden Iberian state saw some €4.8bn worth of medium-to-long-term bills shifted – a significantly greater tranche than policy-makers in Madrid had expected. The fact that the gilts were sold at lower average yields than previous recent offerings provided further cause for encouragement regarding Spain’s troubled fiduciary position. However, debt yields on Spanish 10-year bills remained at just below the 6% level in the aftermath of the auction. This suggests that bond market investors are more worried about the historical level of debt built up by Spain rather than by her near-term ability to raise funds as Madrid may still look for a bail-out package, eroding confidence caused by the ECB plan. Whilst countries including Spain, Italy, Greece and Portugal continue to flounder, the euro is likely to remain out of favour in the currency markets. This, coupled with gloomy PMI reports out yesterday, was quoted by many as a nudge in the ribs for many investors, causing a broad sell off of the single currency which caused the EUR to fall 0.6% against sterling and lose ground to the tune of 0.4% against the USD.
The pound tracked the euro lower against the dollar yesterday, with dealers concerned about the impact of a fragile euro zone economy on the UK, which has strong trade links with Europe. It fell 0.25% against the Greenback but rose against the euro. However, the pound would surely have made up further ground against the single currency had it not been for yesterday morning’s release of mildly disappointing UK Retail Sales data for August, although these were cited as being negatively skewed due to Olympics. Of course all eyes are on data releases in the run up to the next BoE meeting in November. Though the minutes this week suggested more QE was possible, there is hope that the better data may stay the BoE’s hand come November and this is standing the pound in reasonably good stead. The big question is will the UK economy bounce back strongly enough to convince the BoE to hold off and will sterling be able to hold it’s ground particularly against the euro.
The dollar (and the yen) strengthened against most of their major counterparts as demand for the perceived safety of those nations’ assets increased after separate reports showed China’s manufacturing and Japanese exports declined for a third month . In times of economic stress, investors seek dollar-denominated assets because it is the world’s reserve currency. The dollar gained ever so slightly at around 0.2% against sterling yesterday, and extended ground made earlier in the week against the euro tipping EUR/USD lower.