European Closing Thoughts 30/07/12

Speculations that euro-region policy makers will resume purchases of so called peripheral debt drove yields down on Spanish government bonds. Spanish Letras del Tesoro yields fell 1.94% to 6.6130, while, and here come the news, Italian BTPs yields rose 1.19% to 6.027, as the nation sold 5.48 billions euros of notes (All detail in today's Mid-Session review).

German two year yields dropped to a record minus 0.08 after a report showed euro-area confidence worsened in July. During the day it touched minus 0.096 percent, the lowest yield since Bloomberg began collecting the data in 1990. The rate was negative for a 17th day, it means that investors who hold the debt to maturity will receive less than they paid to buy them.

Markets closed in the green to their highest level since April amid optimism that the ECB will win support from policy makers for a plan to ease the euro area's debt crisis. Optimism was sustained by the meeting held today between Geithner and Schaeuble who emphasized “the need for policy makers to adopt and implement all reform steps required to deal with the financial crisis and crisis of confidence” and also that, U.S. and Germany “will continue to cooperate closely with their partners when advancing the policy agenda in autumn to further stabilize global and European economies”.Bloomberg reports.

Italian Ftsemib and Spanish Ibex lead the gainers, both indexes were up 2.80% respectively to 13,978.04 and 6,801.80. Euro Stoxx 50 gained 1.70% to 2,307.63 and German Dax was 1.27% higher to 6,774.06. Gains in the equity  space were not confirmed by the cross Eur/$, which was down 0.54% to 1.2257$ failing to clear the 1.2300$ mark. Commodities,like Gold and Oil(Wti) were both slightly negative: the first 0.02% lower to 1,622.30$ and the second down 0.41% to 89.76$.

At this point i would like to underline that: the European's equity derivatives market is sending signals of a strong recovery in investor's appetite for the risk, the put/call ratio on the Euro Stoxx50  fell to a one month low of 0.57 according to data from Eurex exchange. A shift that was emerging from last week's fund flow data form EPFR Global:”Data showed Europe equity funds recorded overall outflows for the third straight week, with retail redemptions on the rise, but institutional investors committed money to these funds for the fifth time in the past six weeks, data showed”. Reuters reports.

But careful to think that the long side is the only leg to play, because we think that portfolio managers are buying call just to not be left behind their benchmarks therefore gaining market exposure through derivatives instruments instead of “cash” commitment.Thus, a number of investors are still doubting that the ECB policymakers will be able to deliver in line with market expectations this week, due to the fact that Germany's Bundesbank still opposes a resumption of the bond buying programme, seen as a crucial steps “to buy time” to the Spanish and Italian governments.

Therefore, sometimes is better to have the clear picture before putting money on the table.

Originally posted at www.77sigmatrading.com