Dollar Firm, Awaiting More Bernanke
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The US dollar is firm against the major and most emerging market currencies. Asian equities could not match gains in the US yesterday and the MSCI Asia-Pacific Index fell fractionally. This reflects weakness among emerging market equities, as the Nikkei gained 1.3%. The MSCI Emerging Market Index is off about 0.3%. European shares are firmer with the DAX, the exception, where the losses in technology and consumer services offset the gains in the other sectors. The first decline in SAP software sales was the main impetus.
Debt markets are mostly firmer, following the gains in the US yesterday. Of note, however, even though Spain's bond auction was well received, Italian and Spanish benchmark 10-year bond yields are 1-2 bp higher. Political issues for both countries are becoming salient. There has been talk in the markets about the risk of a Spanish sovereign downgrade. Yet, the 5-year credit default swap is softer on the day and largely flat on the week. Over the past several sessions, Spanish bonos have outperformed Italian BTPs.
The news stream has been fairly light. There are two main developments that stand out. First, a German newspaper (Welt) is reporting that the ECB has reduced haircuts for asset-backed securities as collateral in refi operations. It is difficult at this time to get confirmation, but it is the direction that we (and some others) had thought the ECB was moving. The purpose is to help improve lending to small and medium sized businesses. Such loans can back ABS and now those ABS can be exchanged for more cash at the ECB.
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