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German bond auction failure spooks markets

News post market close yesterday appeared somewhat polarised, with an increase in IMF lending to eurozone countries not sufficient to offset concerns over a decrease in factory activity in China. The latter was caused by a flash purchasing manager’s index for November which showed a contraction in activity this month with a figure of 48, compared with 51 in October and below forecasts.

It was sufficient to overshadow positive eurozone crisis developments, in which the IMF announced it is to launch a 6 month liquidity line in an attempt to help countries that may suffer from contagion as fear spreads form one bond market to another. The Precautionary and Liquidity Line as it is named will aim to provide insurance (short term liquidity) in the event of future shocks. It will be available to countries with relatively good policies that are struggling as a result of issues outside their control. Figures suggest that the funding could be up to as much as 500% of the country’s usual IMF quota, with longer liquidity lines possible.

The Chinese economic data weighed on mining companies and integrated oils which were among the biggest equity losers. Fear was augmented early in the day following a German Bund auction in which the Debt Agency had to retain a huge portion of its new issue due to insufficient demand in the form of bids. The auction failure was labelled the worst in recent memory, although commentators were divided as to its explanation, one possible (and more optimistic) reason being that investors were simply not attracted to the debt which, at 1.98%, can be considered very expensive. Others however noted at how quickly the crisis has reached the core of Europe with German 10 year bund yields notably higher than their counterparts in the US.

Indices lost ground throughout the afternoon to close down 67 points at 5139, a 1.3% loss on a day that also experienced mixed messages from a raft of American economic data. The US indices were harder hit, the S&P 500 nearing a 2% loss possibly as a result of traders not wanting to sit on long positions ahead of Thanksgiving Day (a national holiday) tomorrow.

This was posted in Bdaily's Members' News section by John Dance .