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Spanish bond auction lifts global sentiment

A keenly awaited short dated Spanish debt auction was well received by the market today, as Madrid sold €3.2 billion of 12 and 18 month debt above the €3billion target. The increased demand did however come at a price; the 1 year paper averaged a yield of 2.623% with the 18 month averaging 3.1%, both up considerably from the 1.4% and 1.7% at previous auctions, respectively. It was apparent that investors focused on the successful outcome of the auction, viewing it as a cleared hurdle, and weren’t fazed by the higher borrowing costs that Spain is having to pay. The 10 year yield eased slightly to 5.9%, suggesting improved confidence ahead of longer dated auctions at the end of the week.

Domestic economic data showed that inflation had risen unexpectedly last month (as measured by the CPI), as higher food and clothing costs pushed up prices. The Consumer Price Index was 3.5% in March, up 0.1% from a month earlier, whilst the Retail Price Index (including housing costs) declined to 3.6% in March from 3.7% the previous month.

A German ZEW economic sentiment index rose more than the forecast 20 to 23.4 in March, the highest reading since June 2010. The unexpected improvement in the expectations of German institutional investors and analysts added support to the theory that Germany may avoid the recession plaguing the rest of the continent.

There was however disappointment as US data highlighted that the number of new residential buildings that began construction dropped to an annualised 654,000 in March, below forecasts and the previous reading. The data, combined with a poor National Association of House builders Index yesterday, may suggest that previously upbeat figures may have been boosted as house-building was pulled forward over the unseasonably mild winter, as opposed to a sustained recovery in the sector. Data released later in the day showed that industrial output was flat over the month, against expectations of a 0.3% rise.

Despite a mixed day in terms of data, it appeared the market latched onto a successful Spanish auction, maybe not surprising as it has been at the forefront of attention recently. There was a tangible risk-on mentality throughout the day, with stock market indices higher by more than 1% globally largely led by banking stocks, with commodities gaining ground. The FTSE 100 put on 1.78% to finish at 5767, although it underperformed European indices with gains in France and Germany closer to 3%.

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