Euro Slump Extended, Mediocre Italian Bond Auction, Poor Hungarian Debt Sale

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The US dollar is modestly firmer against the major currencies, but is more mixed against the leading emerging market currencies. The euro extended yesterday's losses in Asia, falling to $1.2866, the lowest level since the start of the year. The euro's losses against the yen were also extended with new 10-year lows recorded just above JPY100.30.

Global equity markets are mixed, after the S&P 500 snapped a 5-session advancing streak yesterday. Modest gains in China and Taiwan. Korea's Kospi eked out minor gain despite disappointing Nov industrial output declined 0.4% compared with the consensus estimate of 0.6% gain, though the Nov current account hit a new record of almost $5 bln. As widely anticipated, Taiwan left rates steady at 1.875%. European bourses are narrowly mixed. Basic materials and commodities are the strongest sectors, while financials and telecoms are the laggards.

Italy wrapped up a difficult year by selling about 7 bln euros of a 5-8 bln target range. Yields were around 50-120 bp lower than the last auctions with similar bid-cover. The results did not help the Italian bond market stabilize and the 10-year yield continues to flirt with 7%.

Hungary's bond auction was considerably less well received. It sold only HUF15 bln though wanted to raise HUF33 bln and officials rejected all bids for the 3-year note and the 5-year yield jumped 90 bp to 9.63% from 8.72% a couple of weeks ago.

Gold is leading the commodities lower and was off 2% at its lows near $1524, its lowest level since the first half. On a 60-day rolling basis, using percent change, gold and the S&P 500 are the most correlated (0.53) since April 2010. Grain prices, like wheat and corn have rallied 14% and 12.5% respectively over the past two weeks.

Yesterday's 1.2% rally in wheat was the 8th consecutive advancing sessions (the longest in 4 years) Corn advanced 2% yesterday with reports cited unfavorable weather in South America. Oil prices are little changed after yesterday's reversal. While Iranian tensions are elevated, the market appears to be looking past the posturing.

The economic calendar is light. The main features from Europe include an unexpected slowdown in euro zone money supply growth. M3 slowed to 2% year-over-year in November, down from 2.6% in October. This is important because it suggests that ECB liquidity (and expansion of its balance sheet, which some in the media played up yesterday) is not feeding through to money supply or loans. Private sector lending fall sharply to 1.7% from 2.7%.

Sweden reported a much smaller than expected trade balance for Nov of SEK3.5 bln, half as much as the consensus expected. This highlights the vulnerability of Sweden, which exports roughly the same percentage of GDP as does Germany, to a global slowdown and/or the interruption of trade finance.

German states continue to report Dec inflation readings and it appears the nation as a whole will see price pressures east to 2.2% from 2.4% in Nov.

US economic data today features weekly initial jobless claims. In recent weeks, the initial claims have fallen to their lowest level since H1 2008 and even the four-week average, used to smooth out the noisy time series has fallen to 3-year lows. Continuing claims have also fallen to 3-year lows.

The reports covering the second half of December will be skewed by the holidays, but the time series suggests the labor market is improving. And just in time too, as recent reports indicate that capital spending on equipment and software slowed in Q4. The US also reports the Chicago PMI. The strength in the auto sector and in manufacturing in general, will likely keep diffusion index above 60.

With the Italian auction behind us, the focus tomorrow may shift to Spain. The new prime minister holds his second cabinet meeting and is expected to announce the first new austerity package, ahead of the final budget in March. The austerity is likely to propose 4 bln euros in savings. Rajoy will seek to deliver a 4.4% budget deficit in 2012 after about a 6.5% deficit this year. The government will need to secure around 20 bln euros in savings. In the recent election, Spain gave overwhelming support to the Popular Party and its pledge for more austerity.