Credit Writedowns

Spain and Italy reported today that the share of bad loans have continued to rise. There is nothing to suggest that this is the peak. In fact, further deterioration is likely.

This is what has changed in the EM space in, our view. 1) Brazil is stepping up its defences against market volatility. 2) Signs that China is looking for more (and better) sources of external funding sources is mounting. 3) Turkish central bank governor Basci seems ready to take action to stabilize markets.

ECB President Draghi suggested last week that the central bank was taking a fresh look at the deposit rate. There does not appear to be any economist that thinks it is a good idea. The reasons vary, but the two main reasons are that it would likely prove ineffective in boosting lending and would be potentially disruptive to the money markets and financial institutions.

This is an important day for Portugal. It is selling 10-year bonds for the first time in more than two years. Demand is reportedly strong. Today’s 10-year sale follows the 5-year bond sale in January and heralds to full return of Portugal to the capital markets. Portugal’s success in returning to the capital markets is a success for European officials more broadly.

By Marc Chandler The US jobs report offered a pleasant surprise after the string of mostly disappointing data. Private sector employment rose 165k and the Feb and March series were revised up by 114k jobs. The 3-and 6-month averages now stand at 215/216k. The unemployment rate fell to 7.5%, the lowest since December 2008. The one aspect of the report [...]

ECB President Draghi confirmed the decisions made today to cut the main refi rate by 25 bp to 50 bp and cut the lending rate, the ceiling of its rate corridor, by 50 bp. Most importantly he seemed more open to a cut in the deposit rate and it is this that drove the euro lower after trading choppily initially.

Spain’s 10-year bond yield has fallen 108 bp this year. Just above 4%, the yield is the lowest Q4 2010. The 2-year yield has fallen 93 bp this year. The yield is slipping through 1.70%, for the first time Q2 2010. Recent data suggested that Spanish banks have been the featured buyers of Spanish bonds. The Spanish government released data at the end of last week that we have poured over. These figures paint a strikingly different picture. Spanish banks have indeed bought Spanish debt, but non-residents bought even more in Q1.

The first left-right coalition in Italy since 1946 has survived its first confidence motion in both chambers. As difficult as it may have been to break the political logjam, the hard work lies ahead for Prime Minister Letta.

There have been three recent developments in Spain: the new record high unemployment, the earnings reports of several large banks, and the government’s new fiscal forecasts and strategy.

Spanish 10-year yields continued to trend lower over the course of the week. The roughly 35 bp decline in yield brings the drop since early February to about 120 bp and 150 bp from a year ago. The 2-year yield is slipped below 2% for the first time since 2010. The 5-year credit default swap, the price of insuring sovereign exposure, has fallen from 470 bp a year to a little than 250 bp.

Italy is getting closer to putting together a grand coalition government. This has always seemed to us the most likely scenario, but the route to it has been circuitously torturous. Three considerations have led to President Napolitano granting the prerogative of forming a government to the deputy leader of the center-left, Letta.

The Swedish krona is somewhat firmer today but it is the biggest loser among the major currencies this week. It has lost about 2.3% against the dollar and 2.1% against the euro. According to Bloomberg, this is the single biggest weekly decline of the krona against the euro in about a year and a half. There were two factors that [...]

The yen bears have been frustrated by a series of developments. They were unpleasantly surprised by news that the Japanese themselves were large sellers, not buyers, of foreign bonds in the first full week of the new fiscal year. In addition, more often than not, since the BOJ’s announcement, the yen has strengthened, not weakened, in the Tokyo trading session. And the yen bears were unable to absorb the yen buying that capped the US dollar just below the psychologically important, JPY100 level.