Woes in ROW Lift Dollar

The US dollar is mostly firmer today. The euro is heavier following news that Greece and Ireland’s budget deficits were even larger than expected by the EU’s calculations and this is seen as much more important that the flash PMI readings, which showed continued improvement. New that Fitch warned that Japan’s creditworthiness was a risk from its rising debt initially weighed on the yen, the unwinding of cross positions lent the yen a modicum of support against the dollar. An increase in mortgage approvals and a smaller monthly budget deficit helped offset the disappointing retail sales report to give sterling a little boost, but also appeared to be dragged lower by the euro.

Equity markets are broadly lower. The MSCI Asia-Pacific Index fell around 0.8%, led by a 1.27% drop in the Nikkei. Health care, matertials and utilities were among the biggest drags, while the big news was Moody’s cutting Toyota’s rating at Aa2 from Aa1. The Shanghai Index slid 1.1%, with banks and developers still under pressure. European shares began firmer but quickly turned lower following the estimates of larger deficit. Some disappointing earnings also weighed on prices. Most bourses are off nearly 1% near midday in London. Financials, industrials and oil sectors are the most significant drags. Consumer goods sector is actually posting small gains.

Safe haven demand appears to be helping Treasury and German bunds. Ten year Greek bonds yields are up another 30 bp today. Spain’s 15-year bond auction was relatively weak with a 1.79 bid-cover. Deficit news weighed on Irish bonds, with yields rising 10 bp today. Portugal 10 year bond yields surpassed Ireland yesterday and yields are up another 4 bp today. A couple of features in the emerging market space to note today. Russia is raising $5.5 bln in its first international debt offering since 1998. There is $2 bln of 5-year bonds and $3.5 bln of 10-year bonds. Given that Russia’s oil/gas/mineral exports are largely invoiced in dollars and it is taking on a dollar liability, the bonds may be particularly interesting. Egypt is reported about to sell $1 bln 10-year dollar bonds (~5.875% yield) and $500 mln of 30-year bonds (~7% yield) may also attract interest. We note that the EMBI+ Index is a little above 240 bp down almost 80 bp over the past couple of months.