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.