A largely positive week thus far for the Euro was furthered yesterday, with a successful outcome to the Portuguese bond sale. A well received auction of government debt underpinned a more confident mood in the markets, boosting US and European equities towards two year highs, and forcing another surge in oil prices on growth prospects. Rumours that EU officials are considering a significant increase on the region’s bail-out facility also supported risk appetite. Though the Iberian Peninsula as a whole has a significant amount of debt to put to market over the remainder of this quarter, news that the Portuguese had overcome this first major hurdle helped sooth nerves amongst investors. The EUR600m of 10 year bonds was sold at a yield of 6.71%, less than the 6.80% at the previous auction in November, and more significantly, less than the 7% yield mark that is deemed as making recourse to the European Financial Stability Facility likely in due course. The Euro bounced accordingly to above 1.31 against the Dollar, where it currently resides, though you’d be hard pushed to find anyone that would wager this as a sustainable level. When 3 year Portuguese bond yields are 135 basis points higher than the same point in November, it is safe to say people see great risk in the short term.
European markets are opening flat today ahead of central bank meetings from both the Bank of England and ECB. Today’s MPC meeting will show no change in Bank Rate or the level of asset purchases, though the mood-music of the Committee appears to be changing towards a more hawkish stance and it will be interesting to see the discussion at this meeting in the subsequent minutes. For now though, the data distortions from the extreme weather and the VAT hike are going to make the MPC’s life difficult. The Bank has rarely felt as much heat in the form of public criticism as it has in the first few days of this year. Inflation is nearly double its target, and whilst no one would dispute that the rate is distorted by factors outside the bank’s control, the VAT hike and sterling weakness to name two, the fact that the MPC has been forced to sit on it’s hands for an extended period in order to ride out the storm has only seen the pressure to act mount from outside.
While the ECB is universally expected to keep rates on hold at 1.0% today, the post-Council meeting Press Conference will inevitably be watched for President Trichet’s musings on the sovereign debt crisis and the Bank’s bond-buying program.