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EURO GOVT-Gloomy corporate news lifts Bunds before U.S. data
October 26, 2012 / 8:46 AM / 5 years ago

EURO GOVT-Gloomy corporate news lifts Bunds before U.S. data

* U.S. earnings, French bank downgrades underpin Bunds

* Data on U.S. growth due later in the day

* Bunds seen sticking to recent tight ranges

* Tentative signs of normalization - but for how long?

By Ana Nicolaci da Costa

LONDON, Oct 26 (Reuters) - Bund futures rose on Friday as lacklustre corporate earnings, downgrades to French banks’ ratings and record unemployment in Spain highlighted the challenges still facing the global economy.

Results from global giants Apple and Amazon undershot expectations overnight, while in Europe, Renault, Saint Gobain, Gucci and Publicis weighed in with gloomy earnings and outlooks, putting downward pressure on European stocks.

Standard & Poor’s cut the rating of French banks including BNP Paribas - a stark reminder of the problems still facing the euro zone’s second largest economy - but French yields showed little reaction.

The bout of negative news whet appetite for safe-haven Bunds but they were seen trading within recent tight ranges ahead of U.S. third quarter gross domestic product data later in the day.

German Bund futures rose 31 ticks to 140.70.

“The current tight range is limited on the upside by 140.71 and the low we have set is at about 139.45,” Piet Lammens, strategist at KBC said, referring to last week’s low.

U.S. growth is expected to have picked up to an annualised 1.9 percent from 1.3 percent in the previous quarter, according to a Reuters poll.

But even such a rise would not be considered enough to make much of a dent in unemployment, leaving in place doubts about the economy that have underpinned safe haven bonds and kept the Federal Reserve buying Treasuries.

Ten-year German bond yields were down 2.8 basis points at 1.55 percent. They rose as far as 1.625 percent in the previous session but met buyers above 1.60 percent.

French borrowing costs over ten years were flat at 2.15 percent.

HOUSE OF CARDS? Promises of European Central Bank support, should a country like Spain ask for aid, has been a key factor keeping sovereign debt of both triple-A rated and lower-rated issuers in tight ranges.

Investors have been reluctant to make big bets, for fear of being caught off guard should Spain seek help and trigger the ECB’s bond-buying program.

This prospect has also contributed to tentative signs of normalization in sovereign debt markets.

The funding costs of both Spain and Italy have come down sharply, and data from the European Central Bank on Thursday showed consumers and firms put money back into Spanish and Greek banks in September. There are budding signs that foreign investors are venturing back to the Spanish sovereign debt market.

As one trader this week put it, the market is “healing”: “Liquidity is coming back, liquidity meaning the market can digest larger customer repositioning and flows again,” he said.

But Spanish 10-year yields were higher on Friday, rising 6.3 basis points to 5.69 percent as data showed one in four Spanish workers were without a job in the third quarter of this year.

The data highlights the extent to which the recent improvement in Spanish debt markets is based on expectations rather than fundamentals and reality. The grim reality is that Spain for some time to come will remain firmly in the grip of a recession which has undermined its efforts to stabilise public finances.

“That we’ve seen a little bit of improvement is really built on the assumption, on the expectation that there will be an aid request, that the ECB will start buying bonds and the ESM (euro zone rescue fund) will start buying bonds in the primary market,” Elwin de Groot, senior market economist at Rabobank said.

“But it’s all in the assumption that it will happen and if there is a risk that it won’t happen, then you could easily see the vicious circle return in the market and that’s the risk.”

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