In Between Days

by CC December 28, 2011 11:57 pm • Commentary


Asian stocks (MXAP) fell for a third day, the euro weakened to a decade low against the yen and bond risk rose on concern Europe’s debt crisis will slow the global economy. Gold futures declined for a sixth day.

The MSCI Asia Pacific Index slid 0.5 percent at 11:00 a.m. in Tokyo, extending the gauge’s decline this year to 19 percent. Standard & Poor’s 500 Index futures rose 0.3 percent after the gauge sank 1.3 percent yesterday. The 17-nation euro weakened as much as 0.5 percent versus the yen. The Markit iTraxx Japan index tracking debt-default risk increased three basis points to 187.

The European Central Bank said yesterday its balance sheet soared to a record 2.73 trillion euros ($3.55 trillion) after lending to banks last week. South Korean factory production fell for a second straight month, while data today may show Italian business confidence slumped and U.S. pending sales of previously owned homes rose at a slower pace.

“The European problem is going to continue to cause spooks in the market and some spikes in risk aversion,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest-rate risk-management company. “The moves are exaggerated by the lack of liquidity.”


Italy saw its short-term funding costs fall by half on Wednesday, as the first big test of market sentiment since the European Central Bank’s pre-Christmas bid to support banks provided a glimmer of hope in the eurozone debt crisis.

The successful auction of €9bn of six-month bills – sold at an average yield of 3.25 per cent, down from a euro-era record of 6.5 per cent last month – brought some relief early on Wednesday to Italy’s bond market, the world’s third largest. But in thin trading, Italian bonds and the euro came under selling pressure in the afternoon, leaving Rome’s benchmark borrowing costs stuck above the crucial 7 per cent level.

In a topsy-turvy day, Italian 10-year bond yields dropped 25 basis points in the morning but rose the same amount in the afternoon.


The European Central Bank turned the fire hose on the euro-zone banking system last week. The fire is still burning, but the liquidity has simply returned to flood the ECB’s basement — at least for the time being.

The amount of money parked by euro-zone banks in the ECB’s 0.25% deposit facility surged to another new record of €452.03 billion Tuesday, up from €411.81 billion over the Christmas break and well above the previous record high of €384 billion.

Use of the deposit facility is frequently seen as an indicator of stress in the financial system, but the latest surge probably doesn’t reflect any deterioration in the situation since last week. “This is just a mirror image of the liquidity that the ECB is pushing into the system,” said Jacques Cailloux, chief euro-zone economist at Royal Bank of Scotland in London.

Last week, banks had taken a massive €489 billion from the ECB’s first-ever three-year lending operation. In an interview with the German magazine Stern, published Wednesday, Deutsche Bundesbank President Jens Weidmann described the operation as a sort of bridging loan for banks “who will only be on a sound footing again when the sovereign debt crisis is overcome.”

Mr. Weidmann again ruled out an expansion of outright government bond purchases by the ECB to tackle the debt crisis, saying that, “Over time, financing public debts with the money printing press would burden the modest saver and the person with low income.”


The jobless claims, reported at 8:30 a.m. EST, could be the fourth in a row below 400,000, an important level to economists who are now seeing a slightly improving labor market.