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Global bourses recovering with the help of Santa

Global bourses recovering with the help of Santa

The Santa rally has started with global bourses recovering as risk is put back on the table before year-end. With the Korean peninsula seemingly stable Asian equity markets recovered their losses, helped also in part by stronger US housing data. European bourses look set to follow, with sentiment boosted by an oversubscribed Spanish debt auction.

The euro managed to rally overnight, rising from the $1.30 level it has traded around for the first part of the week to $1.3150. The ECB is due to tender an unlimited amount of 3-year money this morning and consensus is for banks to demand around €300 billion. We expect the euro to rally further post-tender as a larger number would be seen as positive for bank lending, while a smaller number suggests that Eurozone banks are more liquid than thought. Meanwhile sterling remains capped at $1.5750 against the dollar.

Public sector finances usually deteriorate in November as October’s quarterly tax inflows drop out. This year should prove no different and we look for net borrowing to rise from £6.5 billion to £19.5 billion, which would still be £1 billion lower than November 2010 and leave the government on track to meet their borrowing targets.

The Minutes of the December MPC meeting will be scrutinised to find how close the MPC are getting to increasing asset purchases. Although the November Inflation Report showed CPI falling sharply below 2% in 2013, the Committee was united in not voting to increase purchases that month. If they want to signal that a further extension is on the cards then one member could break from the pack and vote for an increase in order to manage market expectations. Given his reputation as the most dovish member of the Committee, we would expect Posen to be the most likely to vote for any increase in asset purchases.

Yesterday’s surge in US housing starts and building permits was concentrated in multi-family units. This looks to reflect the rising demand for rental property rather than real demand as single-family dwellings are still lagging. The NAHB survey suggested that the housing market is beginning to stabilise and we will get more confirmation from November existing home sales this afternoon. The market is looking for sales to rise from 4.97 million to 5.05 million, which is a monthly jump of 2.2%. The risk remains a little on the upside and a rise to 5.1 million is certainly not out of the question.

ISDA are due to host a webcast at 3PM today to discuss the potential impact of a break-up of the Eurozone. The meeting is closed to journalists but we could see some reaction in Eurozone sovereign debt markets should participants learn that CDS would not be triggered in the event of any departure and thus have to sell underlying bonds in order to reduce exposure.

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