Morning market commentary – 11/03

The weak Chinese data weighted on equities, in what was an otherwise very quiet day with no major data release or event.

·         However, the big picture has not changed at all as we continue to see an aggressive bid for any fixed income asset offering some yield. Peripheral debt continues to rally with Portugal leading the outperformance, which is not only limited to sovereign debt but also to ABS, RMBS or HY bonds. This on the day, it was confirmed Ireland will be coming back to the market in an auction format this Thursday (4 years after its last auction).

·         On the data side, we had some disappointing industrial production numbers in Europe:

§  French industrial production at -0.1% YoY(cons 1.3%)

§  Spanish industrial production (seasonally adjusted) was flat in January, as it was in December (upwardly revised from -0.3%mom). The annual rate of growth, at 1.1%, was weaker than consensus (1.8%yoy).

§  Italy was the exception, printing stronger at 1.4% YoY versus -0.3% expected.

·         Following the ECB’s meeting last week, the EURUSD saw a new high, which ECB members seem to be willing to play down with words, but I guess we need action or the Euro crisis to revitalise. At the moment, the flows into peripheral debt seem to be playing against this. Noyer was on the wires at Paris Conference, apparently concerned about the rise in the single currency as he said “a strong euro creates down pressure on the economy and inflation”. He also mentioned that rates cuts were not “too controversial” for ECB and “money market yield curve needs to remain low”. About stopping the SMP drain he “fully agreed with Buba chief that suspension of sterilisation is one of the tools ECB could use if needed”. He was not concerned by deflation risk in Europe as “inflation expectation are firmly anchored in positive territories” adding that “low inflation is boosting real income”.

·         Also from the ECB,  Lautenschlaeger told the WSJ that they “have room left to act” saying for example that the “deposit rate could be negative”, while the chief economist of the IMF said the risk of deflation definitely exists in the euro zone.

·         The main Eurozone countries continue to negotiate the bank resolution mechanism and the banking union as the risk is a eurosceptic European parliament in May could make this impossible. But it wont be easy.

·         US equities ended only a touch lower (SPX -0.05) as the economic calendar was light and the situation in Ukraine was stable but remains an overhang on sentiment.

·         On the tapes, Fed Plosser said recent encouraging economic data isn’t enough to change the pace of the central bank’s asset purchases.

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