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Momentum Selling Has EURO Longs Seeking Exit
To date, the Spanish Prime Minister, Rajoy, has moved to contain a political scandal over alleged cash payments to him and leaders of his party. Not surprisingly, Spain's opposition party has called for the PM's resignation. So far this morning Spain, along with Italy, is making investors nervous. It looks like the markets are back to focusing on bond spreads. The spread between Spanish 10's and Bunds is widening, as media reports accuse Spanish high-ranking officials of having receiving payments from a slush fund.
Italian politics is also pressurizing the 'single currency.' The Italian federal election is only a matter of weeks away (February 24-25) and the country's 10-year fixed income benchmark bonds are ticking higher against Bunds as we begin the transfer to the North American trading shift. A number of reasons are causing this morning's unease. With Monti's poll ratings slipping, there is a risk of a possible 'hung' parliament leading to a move towards reform and not austerity. With 'Bad Boy' Berlusconi promising a fresh round of tax cuts, he is threatening to upset the apple cart!
Spain will also be auctioning around +€5b of 2's, 5's and 15-year bonds Thursday. This month sees high issuance from Italy and Spain and Thursday's auction will be a test of the peripheral rally's momentum, after moderate demand but low yields at last week's Italian auction.
Data flow is light this week in the US, with Tuesday's non-manufacturing ISM the main highlight. The market expects the headline to moderate, especially after last December's 10-month high. The reported data should be consistent with market consensus that US growth is improving.
The market expects the "Old Lady" to keep her policy unchanged this week. Analysts note that the main focus will be on the next appearance of the BoE's new Governor, Canada's Carney, ahead of the Treasury select committee. Expect the market to pay close attention to his views on QE and any policy changes in the policy target. The market will also try and decipher his views on governance at the old institution.
To date, GBP remains vulnerable to weak data and a dovish policy stance. Just across the English Channel, a less dovish ECB policy stance and ongoing Euro-lending indicator improvements has Sterling playing second fiddle!