Euro Gyrates, but Doesn't Break

The euro fell amid a mild bout of buy the rumor sell the fact on news of the LTRO.  800 banks took down 529.5 bln euros, slightly above consensus but within expectations. A little more than 200 bln euros reflects the rolling of other borrowing facilities into the three-year tenor. 

That more banks participated (800 vs 525) this time is not surprising as the relaxed collateral rules in seven countries, including Spain and Italy, were partly designed to help smaller institutions.   While the greater participation would suggest the lack of stigma, a more telling indicator will be the relative performance of the shares of those banks that participated and those that didn't.  In lieu of this data, it is noteworthy that financial shares among the strongest sectors in Europe today. 

The larger number of banks participating also translates into a lower average take down.  In the first LTRO, banks took an average of 935 mln euros.  At today's operation the banks took an average of 691 mln euros.  The euro had tested the upper end of its recent range in Asia, setting a new high for the week, but unable to absorb the large offers (talk of a couple yards of euros) around $1.35.  It came off after the LTRO results, but initial support in the $1.3420 area held.  Additional support is seen near yesterday's low.  Overall, the technical tone still looks constructive. 

With the LTRO over, the market's focus shifts to three other issues.  First between today and tomorrow, Italy will make 30 bln euro coupon payments and redemptions.  The interest seems to be on what Japanese investors do with their proceeds.  Talk is that given the anxiety still over Europe's debt crisis and the approaching fiscal year end, Japanese investor may repatriate.  The euro peaked Monday near JPY110.  Key support is seen near the 200-day moving average which held yesterday just above JPY107. 

Second, is the EU Summit starting tomorrow.  The fact that the euro zone finance ministers meeting that had been planned for Friday has been postponed suggests that Germany is not yet ready to agree to combining the EFSF and ESM to build a bigger firewall. 

Third, ISDA's Determination Committee has agreed to make a formal decision on whether the subordination of the private sector to the official sector is tantamount to a credit event.  This will announced tomorrow.  We suspect that ISDA will draw a distinction between de jure and defacto subordination.  What has taken place is defacto subordination, by practice not be a change in bond terms themselves.  

While [so-called risk assets have generally one well, Portugal is a notable exception.  The benchmark 10-year bond yield is up 38 bp to move above 13% for the first time since Feb 8.  In addition to growing realization that Portugal is unlikely to return to the capital markets in the second half of next year, the EU budget commissioner warned today that Portugal's budget shortfall this year may delay the 5 bln euro regional payment. 

The UK economic data continues to surprise to the upside.  Today's batch of data included mortgage approvals and money supply.  Both are at multi-month peaks.   Sterling itself is at the highest level since mid-November.  It jumped above the 200-day moving average, which now should act as support (~$1.59).  

Japanese and South Korea reported much stronger than expected industrial production figures.  Japan's output rose 2.0% in January for the second consecutive monthly gain.  Japanese companies expected additional l1.7% increase in both Feb and March.  Autos, telecoms and electronics led the production growth.   The dollar is consolidating in narrow ranges against the yen today (40 pip range).  

South Korea reported a 3.3% increase in January output.  The consensus had expected a 1.2% decline after the 0.7% fall in December.  The Kospi gapped higher and rose 1.3%, led by consumer goods and technology.    According to the stock exchange figures, foreign investors have bought about $3.4 bln of Korean shares this month.