Spain tests investor confidence with its bond offering

Economic Data

- (IN) India Central Bank (RBI) maintained its key interest rates unchanged as expected
- (IN) India Primary Articles WPI w/e Dec 4th Y/Y: 13.3% v 12.7% prior; Food Articles WPI Y/Y: 9.5% v 8.7% prior
- (FR) France Dec Preliminary PMI Manufacturing: 56.3 v 57.9 prior; PMI Services: 54.1 v 55.0 prior
- (SP) Spain Q3 Labor Costs Y/Y: -0.3% v 1.2% prior
- (SP) Spain Q3 House Prices Total Homes Q/Q: -2.2% v 1.6% prior; Y/Y: -2.2% v -0.9% prior
- (TU) Turkey Nov Consumer Confidence: 91.3 v 89 prior
- (SZ) Swiss Q3 Industrial Production Q/Q: 1.8% v 0.9%e; Y/Y: 5.8% v 5.0%e
- (SZ) SNB Interest Rate Decision: maintains its 3-Month Libor Target Rate at 0.25%; As expected
- (HK) Hong Kong Nov Unemployment Rate: 4.1% v 4.1%e
- (GE) Germany Dec Advanced PMI Manufacturing: 60.9 v 58.2e; PMI Services: 58.3 v 59.0e
- (SW) Sweden Nov Average House Prices (SEK): 1.998M v 1.951M prior
- (SW) Sweden Nov Unemployment Rate: 7.1% v 7.3%e
- (NV) Netherlands Nov Unemployment Rate: 5.2% v 5.2% prior
- (NV) Netherlands Retail Sales Y/Y: -1.7% v 2.9% prior
- (RU) Russia Gold & Forex Reserve w/e Dec 10th: $482.8B v $481.5B prior
- (EU) Euro Zone Dec Advanced PMI Manufacturing: 56.8 v 55.2e; PMI Services: 53.7 v 55.2e; PMI Composite: 55.0 v 55.3e
- (IT) Italy Nov Final CPI (NIC incl. Tobacco) M/M: 0.0% v 0.0%e; Y/Y: 1.7% v 1.7%e
- (IT) Italy Nov Final CPI EU Harmonized M/M: 0.0% v -0.1%e; Y/Y: 1.9% v 1.8%e
- (AS) Austria Nov Consumer Price Index M/M: -0.1% v 0.2% prior; Y/Y: 1.9% v 2.1% prior
- (UK) Nov Retail Sales Ex Auto Fuel M/M: 0.3% v 0.3%e; Y/Y: 1.8% v 1.4%e
- (UK) Nov Retail Sales M/M: 0.3% v 0.3%e; Y/Y: 1.1% v 0.7%e
- (UK) Bank of England (BOE) Quarterly Inflation Attitudes Survey: 3.9% v 3.4% prior (2-year high)
- (PD) Central/Eastern European Dec ZEW Indicator: 22.7 v 31.4 prior
- (EU) Euro Zone Nov CPI M/M: 0.1% v 0.1%e; Y/Y: 1.9% v 1.9%e ; CPI Core Y/Y: 1.1% v 1.1%e
- (EU) Euro-Zone Q3 Labor Costs Y/Y: 0.8% v 1.5e
- (BR) Brazil Dec FGV Inflation IGP-10 M/M: 1.3% v 1.3%e
- (GR) Greece Q3 Unemployment Rate: 12.4% v 11.8% prior
Fixed Income:
- (SP) Spain Debt Agency sells approx €2.4B vs. €2-4B Indicated in 2020 and 2025 Bonds
- Sold €1.78B in 4.85% Oct 2020 Bonos; Avg yield 5.446% v 4.615% prior; Bid-to-cover: 1.7x v 1.84x prior
- Sold €619M in 4.65% Oct 2025 Bonos; Avg yield 5.953% v 4.541% prior; Bid-to-cover: 2.5x v 1.44x prior
- (HU) Hungary Debt Agency (AKK) sold total HUF55B in 2014,2016 and 2020 bonds
- (UK) DMO to sell £825M in 0.625% Indexed-linked 2042 Gilts; Avg Yield 0.763% v 0.607% prior; Bid-to-cover: 1.93x v 1.96x prior



- EU Summit begins with task of trying to break the gridlock towards crisis management
- S&P raises China's sovereign rating Equities: Eurostoxx at 2842, +0.03%, FTSE100 at 5891 at +0.15%, CAC40 at 3887, +0.19%, DAX at 7026, +0.14% - European shares are trading cautiously but remained in positive territory during the session. Investors are eyeing EU's leaders summit in Brussels where debt crisis will be tackled. Leaders are expected to discuss solutions to stop contagion risk and to establish a mechanism to a permanent solution to the EU debt crisis and its stability. Expectations for any significant action are low but positive rhetoric or news could trigger a rally in equities and in the single currency. Markets were also on watch for a much awaited Spanish debt auction, which as expected, was onerous after Moody's placed the country on watch for a possible downgrade. Banks were trading lower due to EU debt concerns.
- BP [BP.UK] lost about 2% in the session after the US administration confirmed a lawsuit against the company and the service providers over spill in Gulf of Mexico. The government requested no limit on liability for damages under oil pollution act. As reported in August, the penalties costs faced by BP could be more than $20B. The lawsuit would be in addition to the $20B fund that BP has established in order to compensate individuals affected by the spill. Note that the establishment of the fund led BP to sacrifice its dividends which the company is expected to reconsider in February 2011. As the impact of the federal lawsuit is larger than expected it is yet uncertain how it will impinge on the company's ability to pay dividends. Transocean also dropped by about 1%. Transocean responded to the US lawsuit stating responsibilities from any oil spill should lay with the operator of the oil rig.
Zodiac [ZC.FR] rose over 1% after reporting an increase in revenues and confirming targets for FY10/11. Thales [HO.FR] declined about 3.5% after an article in La Tribune quoted management as saying that the recovery in 2011 margins would be gradual. Laura Ashley [ALY.UK] was up by 8% following its 19-week like-for-like sales reported at 2.7%. Sports Direct [SPD.UK] opened higher by 6% but shed some of its gains in the session although it's trading in positive territory. Pretax and revenues rose on a yearly basis. Despite trading being ahead of management expectations, the company expects the retail environment in the beginning of 2011 to remain tough.
- SNB members commented after the central bank left rates unchanged. SNB's Jordan commented that currency risks were the biggest risks on the SNB's balance sheet and that it was using higher reserves and diversification to reduce balance sheet currency risks.
- SNB Danthine stated that the central bank had diversified its reserves into various currencies including Australian and Singapore dollars. He added that the diversification process had been done in steps and absorbed by the markets. The strong CHF currency presented a heavy burden on Swiss economy
- SNB's Hildebrand commented that the Swiss economic growth would slow in coming quarters. He noted that the deflation threat had declined despite higher CHF currency
- BoE Posen stated that UK still had a large output gap to close. He added that inflation to be significantly below the BOE's Nov forecasts.
- S&P raised both China's and Hong Kong sovereign ratings.
- ECB's Stark believed Germany should not cut taxes
- Germany's Institutes provided their latest economic outlook. Overall they raised their 2010 and 2012 GDP view for Germany. Howver, Germany's IMK Institute commented that it saw a rising risk of recession in 2012.The IMK noted that Germany's economy would continue to recover in 2011 but expressed that slowing growth in Asia and the US and turbulences in the euro zone posed risks that could lead to a recession in 2012. It noted that export growth would slow in 2011 as several Asian countries would dampen their growth to avoid overheating and as the recovery in the United States continues to be lackluster.
- Bank for International Settlements (BIS) stated that large banks had €165B capital shortfall under Basel III capital rules and such banks would require €577B to meet 7% core Tier 1 capital ratio. National regulators could raise the countercyclical buffer over 2.5%.
Currencies: - The EUR/USD mustered up some gains in the session as the EU Summit set to begin the first of a two-day meeting. EU governments appear close to agreeing on a two-sentence amendment to the bloc's Lisbon Treaty. It would foresee a "mechanism to safeguard the stability of the euro area as a whole" with financial aid for distressed governments "subject to strict conditionality". The sub-1.32 area again proved quite formable for the EUR/USD with again Far East sovereign interest said to be lurking below. None-the-less Euro sell stops building below 1.3160 area. The data for the session was mixed with stronger Manufacturing PMI data for the larger countries but soft PMI services. Dealers took note of one of the German Institute comments that its saw a risk of recession in 2012 for Germany. - The SNB maintained their key rate as expected but noted it began a reserve diversification process that included both the Aussy and Singapore dollars. - The GBP/USD was near 1.56 after the UK retail sales and quarterly inflation survey were stronger than expected. - The softer US yields capped the gains in USD/JPY as it retested the 84.00 handle. The US 10-year yield back below the 3.50% level by a few basis points.
- Peripherals were steady in the session as Spain faced a key test of investor confidence. The two-trance auction results were mixed with sharply higher yields but managed to sell within the expected range.
Geo-Political/ In the Papers:
- The Japanese parliament approved the FY 2011 tax plan, as expected. The plan includes the 5% cut in corporate tax rates and a new environmental tax, which is expected to bring in about ¥240 billion per annum. The FY2011/12 budget will be decided later this month on Friday the 24th of December.
- In the Irish parliament last night, the lower house passed its banking reform and restructuring bill by 78 votes to 71. The bill now makes its way to the upper house where it is expected to pass on Friday, and then be set into law by the end of the week. The bill places more authority into the hands of the government, including the ability to appoint managers to financial institutions.
- According to the Financial Times, Spain's 2011 refinancing needs could see the country fall into a debt trap. The higher the yields increase, the more difficult it could be for the country to raise funds. The ECB has only purchased Greek, Irish and Portuguese bonds, though if it were to begin purchasing Spanish bonds, then it would have to on a large scale due to the size of country's debt market. The article does mention that Spain has €20 billion in cash reserves, and the average cost of its total debt load is about 3.5%, which is below current market yields. As a reminder, as of June 2009, Spain's gross external debt totaled about $2.4 trillion compared to Greece's $553 billion.
- There were details released for PIMCO Bill Gross' Total Return Fund, which indicate last month that his position in US government debt increased to 30% from 28%. This was the first time that the fund raised its holdings of US debt since June. In addition, he also increased holdings in mortgage securities 10 points to 49%. Other notable changes include the amount invested into emerging-market debt, which were down to 8% from 12%, and non-US developed nation bonds at 4% from the prior position of 7%. Note the size of the fund is approximately $1.2 trillion.
- In the Financial Times PIMCO's El-Erian stated that he believed depositors and creditors have used the EU's rescue measures to exit their holdings. New investors have been reluctant to purchase certain EU assets due to concerns about debt levels and the lack of competitiveness of certain countries. Lower investment levels in Europe will make it more difficult for governments to achieve their proposed austerity measures. With regards to Germany, he noted that pressures are rising on the country to do more to help the troubled EU countries and as a result, markets have started to signal initial concerns about Germany's fiscal strength.

Looking Ahead:

- (IS) Israel Dec Inflation Forecast: No est v 2.8% prior
- 6:00 (IR) Ireland Q3 Current Account: No est v -€1.1B prior
- 6:00 (IR) Ireland Q3 GDP Q/Q: No est v -1.2% prior; Y/Y: No est v -1.8% prior
- 6:00 (IR) Ireland Nov PPI M/M: No est v -2.5% prior; Y/Y: No est v -0.7% prior
- 6:30 (BE) Belgian Finance Minister Reynders
- 8:00 (PD) Poland Nov Employment M/M: 0.1%e v 0.2% prior; Y/Y: 2.2%e v 2.1% prior
- 8:00 (PD) Poland Nov Avg Gross Wages M/M: 3.5%e v 1.1% prior; Y/Y: 4.5%e v 3.9% prior
- 8:30 (CA) Canada Oct Int'l Securities Transactions: C$10.0B v C$12.3B prior
- 8:30 (US) Q3 Current Account: -$126.0Be v -$123.3B prior
- 8:30 (US) Nov Housing Starts: 550Ke v 519K prior; Building Permits: 560Ke v 552K prior (revised)
- 8:30 (US) Initial Jobless Claims: 425Ke v 421K prior; Continuing Claims: No est v 4.086M prior
- 8:30 (BR) Brazil Nov Caged Formal Job Creations: 125.7Ke v 204.8K prior
- 9:00 (BE) Belgium Oct Trade Balance: No est v €1.1B prior
- 10:00 (US) Dec Philadelphia Fed: 14.1e v 22.5 prior
- 10:30 (US) Weekly Natural Gas Inventories
- 12:00 (TU) Turkey Central Bank Interest Rate Decision: Expected to maintain the Benchmark Repo Rate at 7.00%
- 14:00 (BR) Brazil Nov Tax Collections (BRL): No est v 74.4B prior
- 16:00 (CL) Chile Central Bank Interest Rate Decision: Expected to raise the Nominal Overnight Rate Target by 25bps to 3.25%