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13 January 2011

Robust Demand for Peripheral European Debt Spurs Euro Rally

Written by dslmpartners
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Global equities remained firm after US stocks rallied on solid earnings and a slight easing in euro zone tensions improved risk appetite. In Asia, MSCI Asia Pacific was up 0.8% and for its highest advance for nearly two years. Japan's Nikkei closed 0.7% higher after running into profit taking after reaching fresh 8-month highs. In Europe, stocks retreated, dragging the Stoxx Europe 600 index down from a 28-month high, led by losses in consumer stocks.

Major averages in the US slipped on disappointing earnings data early and are lower Thursday afternoon ahead of earnings from Intel (INTC) and JP Morgan (JPM). The table was set for morning losses on Wall Street after the Labor Department reported that filings for weekly jobless benefits increased by 25,000 in the latest period, which was 20,000 more than expected. A separate report showed the Producer Price Index [PPI] up 1.1 percent in December, which was .3 percent hotter than expected. Stocks slipped on the data, but trading had turned mixed midday. Then, another wave of selling surfaced about 90 minutes before the closing bell, as investors now brace for earnings news. Tech bellwether Intel releases results after market. JP Morgan could drive the action in the financials Friday ahead of the three-day weekend.

Spanish and Italian bond auctions went well, with decent demand, and helped peripheral spreads decline for a second consecutive day. Greece and Belgium’s 10-year yield were both down 10 bp while Ireland's yields dropped 3 bp. Elsewhere in Europe, bunds and gilts advanced, with the 10-year yields down 1 bp and 3 bp, respectively, rebounding from yesterday’s dip as equities stalled. Meanwhile, Japan sold ¥548 bln of 30-year bonds at an average yield of 2.156%, while US 2-year yield is flat and the 10-year down 1 bp. Elsewhere, the Bank of Korea unexpectedly raised its benchmark rate 25bp to 2.75% from 2.50%. The euro rally 2 big figures against the dollar and the Yen, as investors cheered the positive demand for peripheral debt.