European Market Update 2/27 - Euro-Zone M3 Stays Near 17-Year High

- The European indices have jumped ship and continue to sink on sub-prime lending concerns as well as sinking commodity prices. Stocks also plunged after a drop in the Chinese share market increased concern about slowing investment growth in Asia.
- European government bonds are trading sharply higher in the session. Bonds were unaffected by the M3 data as investors have already priced in an interest rate hike at the March policy meeting. EGBs gained further support after word began circulating that an ECB source said that the ECB council was undecided on whether or not to signal further interest rate hikes. Over in the UK gilts are also trading higher, tracking their European counterparts in what has been a quiet session for the UK. Italy sold €4B in 3-year 4.0% bonds with an average yield of 3.9% and a bid-to-cover of 1.48; the neutral bid-to-cover was called at 1.7. Italy also sold €2.5B in 10-year 4.0% bonds with an average yield og 4.14% and a bid-to-cover of 1.55; the neutral bid-to-cover was called at 1.5.
- In Germany the import price index for the month of January showed that prices rose at their slowest annual pace in over two years as Euro appreciation made products from overseas cheaper.
- The Belgian finance minister said overnight that he is not concerned about inflation, nor is he concerned about wage developments. Reynders said that the finance ministers held a “real dialogue” with the ECB regarding prices at their monthly meeting yesterday.
- Euro-Zone M3 money supply data rose to its highest level since February of 1990 on a y/y and a 3-month average basis at 9.8% and 9.7% respectively. Strengthening the case for further interest rate hikes, the results did not cause a major reaction in the market as investors are already pricing in a 25bps interest rate hike at the March policy meeting.
- In the UK BBA mortgage lending fell to £16.6B in January from £18.2B in February, while mortgage approvals fell to 37,804 from 45,533. Approvals fell to their lowest level in two years suggesting that the BOE’s surprise interest rate hike in January mave have had an impact on housing market demand.
- The German states of Saxony and North Rhine-Westphalia released their CPI data for the month of February overnight. NRW reported m/m CPI at 0.4%, up from the –0.3% last month, and y/y at 1.6%, slightly above last month’s 1.5%. Saxony reported m/m at 0.4%, up from 0.1%, and y/y at 2.3%, down from last month’s 2.4%.
- The US Dollar is trading softer in the session on sub-prime lending concerns as highlighted in the WSJ, as well as Iranian jitters after the Iranian foreign minister said that Iran will never end its uranium enrichment program. Markets are currently engaged in a sector rotation out of stocks and into safe-haven currencies as well as bonds.
- Front moth crude oil futures are currently trading in the middle-end of their session range, and sit in positive territory. Spot gold is trading slightly lower in the session along with spot silver and front month copper futures. Overnight Credit Suisse boosted its gold price forecast to $670/oz in 2007 from the previous forecast of $550/oz. Credit Suisse also boosted its 2008 forecast to $650/oz from the previous forecast of $475/oz.