Markets await Spanish auction

Neither US or Asian Markets were able to sustain the volatility that we saw yesterday in Europe and exchange rates were little changed first thing from where we left them. Traders were therefore keen to lock in the profits from Wednesdays moves and accordingly lifted Eurodollar and cable by about 50 points in early business. Ahead of today’s Spanish 10-year bond auction, however, this might easily prove tempting to traders looking to go short again.

Other than the auction, at which Spain is anticipated having to pay a yield of somewhere near 5.5% in order to get the offer away, the major interest today was going to be the result from the Swiss National Bank monetary policy meeting. This has already taken place, producing no change in rates and an expression of guarded concern over the Franc’s value against the Euro.

The UK retail sales release was also much as expected, coming in at +0.3% month/month, but it was November’s inflation expectations that caused more reaction. The outcome was a figure of +3.9% year/year, up from +3.4% in August and the highest figure since August 2008. This enabled Sterling to move higher against both Dollar and Euro although any appreciation on the back of higher inflation expectations is unlikely to be long-lived. Indeed, we have already had MPC member Adam Posen warning against an over-reaction to the short term inflation level, predicting that the headline number will be well below target (2%) within a two year period. This leaves us with just US housing starts this afternoon, again unlikely to be move provoking, leaving traders focused once again on sovereign debt concerns around this morning’s bond auction.