Solid European bond auctions help to prop up market sentiment ahead of Fed policy statement

By Pan Pylas, AP
Tuesday, September 21, 2010

Solid European bond auctions lift market sentiment

LONDON — Investors breathed a sigh of relief that bond auctions in Ireland, Spain and Greece went smoothly and sent European stocks and the euro higher Tuesday while U.S. investors waited for the latest policy statement from the Federal Reserve.

In Europe, the FTSE 100 index of leading British shares was up 28.74 points, or 0.5 percent, at 5,631.28 while Germany’s DAX rose 32.31 points, or 0.5 percent, to 6,326.89. The CAC-40 in France was 29.03 points, or 0.8 percent, higher at 3,817.04.

Wall Street was poised for a fairly subdued opening following big gains on Monday — Dow futures were down 11 points at 10,660 while the broader Standard & Poor’s 500 futures rose just less than 2 points to 1,138.40.

Ahead of the Fed statement, which is due at 2:15 p.m. EDT (1815 GMT), the focus of attention was on a trio of bond auctions, which, had they failed, threatened to reignite the government debt crisis that engulfed the eurozone earlier this year and raise questions about the long-term viability of the euro currency itself.

Relief that the auctions went smoothly solidified stocks in Europe.

In particular, investors were relieved that Ireland managed to tap the markets for euro1.5 billion by selling four-year and eight-year government bonds, indicating that demand remained firm despite recent concerns that the Irish economy was falling off a cliff as it grapples with sky-high debt levels and a bailed-out banking system.

The amount raised was at the top end of market expectations, and eased fears that Ireland’s government was losing credibility in the international marketplace following rumors last week — since denied — that it would need the help of the International Monetary Fund.

However, the Irish government had to offer higher interest rates than its previous equivalent auction to attract investors — 4.76 percent for the four-year offering and 6.02 percent for the eight-year bond.

“At least this auction was placed with consummate ease,” said David Buik, markets analyst at BGC Partners.

Fears of an imminent explosion in the government debt crisis were further eased by the news that bailed-out Greece managed to raise euro390 million in three-month bills at a slightly lower interest rate than it had to in its previous auction.

Spain also garnered euro7 billion — the top end of expectations — via the issue of 12- and 18-month bills, but had to pay a moderately higher interest rate to get investors to buy.

It’s been a while since European bond auctions have attracted so much interest in the markets.

Concerns over the summer were somewhat soothed by the euro110 billion euro bailout of Greece from the country’s 15 partners in the eurozone and the International Monetary Fund, and a near $1 trillion rescue package to support other eurozone economies failed to dampen concerns about Europe’s shaky finances.

However, many analysts have argued that the respite would only be temporary given the level of debt in a number of European countries, the rates they are having to pay to attract investors and the savage austerity measures that are being implemented — the impact of the austerity will merely weaken economies and raise deficits and debt, undermining the whole exercise, they argue.

“The endgame to the eurozone debt crisis is some form of debt restructuring, which implies an effective default,” said Neil MacKinnon, global macro strategist at VTB Capital.

Now that the bond auctions have come and gone, investors will increasingly start focusing in on the policy statement from the Fed later. Investors will be looking to see if the rate-setting Federal Open Market Committee hints at whether it is moving towards announcing another raft of measures, such as bond purchases, to get the U.S. economy going again — the purpose of this so-called quantitative easing is to lower rates on such debt to stimulate the economy.

Analysts cautioned against expecting anything dramatic from the Fed given a run of strong economic data — last week’s weak consumer confidence survey from the University of Michigan notwithstanding.

“Even if the Fed leaves the door wide open to such measures at the November/December meetings as I expect, they risk disappointing a minority of participants who expect something more immediate, not least because a move later in the year is still data dependent,” said Alan Ruskin, an analyst at Deutsche Bank.

The same factors that are dominating stock markets were evident in currency markets too, with the euro benefiting from the successful passage of another batch of bond offerings before the Fed statement.

By mid afternoon London time, the euro was 0.5 percent higher at $1.3136 while the dollar was 0.4 percent lower at 85.37 yen.

Earlier in Asia, Japan’s Nikkei 225 stock average surrendered early gains to close down 23.98 points, or 0.3 percent, at 9,602.11 as the country returned from a Monday holiday. Investors were keeping watch on rising tensions with China over the detention of a Chinese fishing boat captain near disputed islands. Beijing severed high-level contacts with Japan on Sunday and called off a visit by Japanese youth to Shanghai.

Hong Kong’s Hang Seng index rose 0.1 percent to 22,002.59 and Singapore’s benchmark gained 0.2 percent to 3,088.34.

The Shanghai Composite Index inched higher by 0.1 percent to 2,591.55 while Australia’s S&P/ASX 200 dropped 0.3 percent to 4,617.50.

Benchmark crude for October delivery was down 93 cents at $73.93 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose $1.20 to settle at $74.86 on Monday.

will not be displayed