23 November 2011
Non-Independent Investment Research
An ugly German bond auction saw German yields actually rising more than most EU counterparts. This is a new development – what are the knock-on consequences? Meanwhile, US data sours a bit.

See more on my reaction to the poor German bond auction in my earlier post. Interesting to note in the wake of that auction that German yields have actually risen more than most other European sovereign yields. Only Belgian and Greek 10-year debt saw yields rise by more. Belgian spreads are wider after the collapse of budget talks and on rumours and uncertainty over the fate of the Dexia breakup.

In the past, the shrinking in most spreads to Germany would have indicated reduced risk/Euro aversion, but in this case, one has to imagine that the move has more to do with the unwinding of bets of a further aggravation in spreads, since the entire point is that the auction sows doubt about the solidity of the German fiscal foundation. The plot is thickening unbearably for Europe, and EURUSD drooped to a new six-week low on the news and EURGBP reversed back lower as well after toying with the key resistance we discussed yesterday a 0.8650/75.

Adding to negative vibes for the Euro were preliminary Euro Zone manufacturing and services PMI’s that mostly showed the gloom deepening. Somehow the German services sector continues to hold out and the overall Euro Zone services sector is still contracting, though less than fears. But the Euro wide data shows the manufacturing slump deepening (46.4 reading vs. 47.1 in October). Adding insult to injury, Fitch was out jawboning on the risks to France’s sovereign debt outlook as the country “can’t absorb more shocks without undermining AAA [rating]”.

BoE Minutes
While the BOE minutes show a rather solid alignment of the MPCs on the need for further easing and the noise in the markets and in the press has been rather GBP negative to say the least, GBP still managed to pull back against the Euro in today’s trade and can only decidedly be looked on as weakening if EURGBP pulls back through the 0.8675 area (and won’t look strong unless it can take out 0.8500 to the downside).

US Data
US data just may be turning the corner to the negative side a bit here after the last few data points of yesterday and today. Yesterday’s Chicago National Activity Index was negative and the core capital goods orders released today was quite weak, especially considering the sizable write-down of the September data (revised down from +2.4% to +0.9%, meaning that the sum surprise for the last two months relative to expectations is a chunky -2.3% MoM. Elsewhere, while Personal Income data for October was encouraging, Personal Spending growth in October was a disappointment and the thought of the US consumer tightening purse strings again would not be good for the US economy.

Chart: AUDUSD
Aussie is suffering the most in this environment, as it has been the weakest currency among the G-10 over the last three days. We have pointed out that risk aversion and moves in interest rate differentials were pointing in that direction already, but the Chinese manufacturing PMI overnight was a key trigger. The pair has had a remarkable roller coaster ride in recent months – will the latest sell-off deepen further or find itself just as steeply reversed as the last two steep consolidations? Note that this 0.9700 area is the last heavi