EmailWell, as much as one wanted to believe the rally in the equity market on Friday was a sure sign of things to come, the eurozone bond markets are providing a reality check this morning.
Despite a successful 12-month bill auction in Italy, the yield on Italy's 10-year note has jumped 43 bps to 6.66%; meanwhile, the yield on Spain's 10-year note has increased 29 bps to 5.94%. That is definitely not how the market spells relief.
The jump in government borrowing rates reflects concerns that the latest resolutions from the EU Summit are not the grand solutions many had hoped they would be ahead of the summit.
In brief, if the aim of EU leaders was to restore investor confidence, the eurozone market is telling us so far that they missed their mark.
Moody's has essentially suggested as much today, noting the outcome of the summit has not changed its decision to review its EU sovereign credit ratings in the first quarter. That admission, and a contention by the OECD that the developed world faces a great deal of rollover risk, has weighed on the aforementioned markets, as well as most equity markets.
The S&P futures are currently down 13 points and are trading 0.7% below fair value.
Trade data out of China showing a deceleration in both export and import growth from October, along with a weak industrial production report out of India, has also capped the equity market's enthusiasm at this juncture.
In due time, growth trends in the U.S. economy will be back in focus. Tomorrow will bring the November Retail Sales report and an updated policy directive from the Federal Open Market Committee.
The impending FOMC decision has perhaps been one of the least talked about decisions in some time, having been completely overshadowed by matters in the eurozone. Then again, market participants got a pretty good sense of what is likely to be heard from the FOMC with the recent announcement of coordinated action to boost dollar funding access.
The FOMC directive, therefore, is apt to emphasize the following points:
- The improvement in U.S. household spending
- The improvement in the labor market, with the caveat that unemployment is still far too high
- Contained inflation and inflation expectations
- The funding stresses in financial markets
- Downside risks to growth and
- A willingness on the part of the FOMC to implement further nonstandard policy measures if necessary
Following the FOMC decision, the market will be left to concentrate on initial claims, PPI, industrial production, regional manufacturing, and CPI data, all of which will be released on Thursday and Friday.
In the meantime, participants should be prepared for continued volatility in the capital markets.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial, please email researchsales@briefing.com.
