Spain In Focus Again
Spanish 10y yields rose by 32bp to breach the 6.0% level yet again as risk assets sold off on Wednesday. Negative sentiment following the joint statement on ESM guidelines issued by the Finance Ministers of Germany, the Netherlands and Finland, and uncertainty about the early elections in Catalonia continued to weigh on EUR during the New York session. According to the guidelines stipulated by the ministers, ESM bank recapitalizations should “only apply to new cases” and not legacy assets and banks should use the ESM only as a “last resort” after using private and national public capital. These measures, if implemented, will put the burden of recapitalization again on the sovereign – which does not help in removing the bank–government linkages especially in countries like Spain. Meanwhile, street protests opposing the austerity measures continued for a second day in Madrid as the Spanish government prepares to submit a structural reforms plan to the EU and approve the 2013 budget ahead today. The government hopes that a “pre-approval” of its reform plan could help in avoiding tougher austerity measures when it finally requests EFSF/ESM aid. Positive headlines in this regard would be mildly supportive of EUR but political risks surrounding the regional elections in Spain could limit the upside. Besides, investors probably would want to wait till Friday, when the Spanish government releases the bank stress results, for further direction on EUR. On the data front, CPI in Germany grew by 2.0% in September, in line with expectations. In the US, new home sales dropped by 0.3% m/m in August against the consensus call for 2.2% rise though the annual rate at 373k is still higher than average annual rate in Q2 and Q1. The Eurozone M3 number is due today and could provide further insights into commercial bank lending habits throughout the region.
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UBS Investment Bank