A successful bond auction in Spain has investors moving back into euros...
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In This Issue.

* Spain's bond auction a success...

* ECB and BOE to meet today...

* Traders test the SNB...

* Official jobs numbers are questionable...

And, Now, Today's Pfennig For Your Thoughts!

A successful bond auction in Spain has investors moving back into euros...

Good day. We woke up to a winter wonderland this morning as we have a couple inches of snow on the ground and it is continuing to come down pretty hard. It is a really light snow and the winds are blowing it all around which is making driving a bit tricky. I passed several accidents on my way in, and I just heard the closed down one of the major highways. Chuck may have mistimed his escape from winter by a few hours as he was scheduled to fly down to Florida today. It sounds like the snow will be ending mid morning, so hopefully his flight won't be delayed.

Investors continued to escape the problems in Europe yesterday as the euro got sold throughout the trading day. Fears of another debt downgrade by Fitch and worries about inaction by the ECB were the main drivers of all of the selling. The euro weakened to a 16 month low of 1.2662 before starting to move a bit higher in late trading. The ECB will be meeting today and currency traders fear they won't take any additional action to stimulate the European economy. As Chuck pointed out in yesterday's Pfennig, the latest data doesn't really suggest any additional help is needed but bond buyers want to see the ECB step up their purchases of debt in order to help support bond prices.

The rating agencies also weighed on the euro yesterday was a rumor that France's top credit rating would be cut and Fitch Ratings said Italy faces a 'significant chance' of a downgrade. The French Finance Minister Francois Baroin denied having been notified of such a move, and I couldn't find any confirmations of a move by the ratings agencies on news wires this morning.

The euro is actually rallying in early trading, up almost a full cent from yesterday's low. The move higher was sparked by the successful bond auction in Spain. The Spanish were able to sell almost twice their maximum target of debt at an auction today, including a new three year benchmark. Spain sold just under 10 billion euros of notes vs. the target of 5 billion. And these bonds were sold at rates which were slightly lower than previous auctions, which was welcome news to EU leaders. The good demand for Spanish debt, combined with the better than expected data yesterday will definitely decrease the pressure on the ECB to step in and do something during their meeting later today. It is widely expected that the ECB will leave interest rates unchanged at 1% and the successful debt auctions which have been occurring over the last few weeks will definitely decrease the pressure for stepping up their bond purchases.

It isn't like the ECB has just been sitting on the sidelines watching the debt crisis. The ECB injected a record amount of liquidity into the markets back on December 20 when they awarded 489 billion euros of three year loans to European banks. In fact, the ECB has been a bit more active than our own Fed in pumping money into the markets, which is saying something! But desperate times need desperate actions, and the moves certainly seem to have stabilized things in the European debt markets. While we will continue to see volatility in the euro, I firmly believe the single currency will survive.

The Bank of England will also be meeting today, and the pound sterling is being sold in early trading. Sterling touched a three month low vs. the US$ this morning as investors worry the UK economic recovery will stall out. A report showed UK manufacturing contracted for a second month in November, falling .2% which was in line with economic forecasts. This report follows another yesterday which showed the trade deficit widened more than economists forecast. These stories sparked worries that the economy isn't on as solid a footing as previous reports indicated

The BOE was one of the first to institute an aggressive program of bond purchases, but the current program is scheduled to end next month. Speculation is increasing that the program will now be extended with another round of purchases, with an announcement coming as soon as today's meeting. While investors pushed the euro lower on thoughts the ECB wouldn't be doing any additional purchases, the pound is being sold on the thought that the BOE will be increasing their debt purchases. It doesn't make since to me either, but that is just how crazy these currency markets are right now!

Investors are using the uncertainty created by the resignation of Swiss National Bank President Phillip Hildebrand to try and test the SNB's self imposed floor of 1.20 CHF/EUR. The move lower by the euro yesterday gave currency investors a perfect opportunity to test the resolve of the remaining board members. The SNB has passed this test so far, and they were helped out by the euros move higher his morning. A strategy piece from Standard Bank in London early today suggested Hildebrand was ready to move the floor up to 1.25, but these plans will probably be delayed now. "Had Hildebrand remained at the helm of the SNB, he might have led the bank to raise the target to 1.25 or more, but now that prospect has been dimmed," Steve Barrow of Standard Bank wrote today. Thomas Jordan, who was appointed the SNB interim chairman has reiterated he's ready to defend the currency ceiling with the 'utmost determination' if needed. I'm sure the currency traders will continue to test the SNB as the Swiss government has indicated it will take as long as four months to appoint a permanent replacement for Hildebrand.

With the euro selling off yesterday, most of the other currencies followed suit. But things have shifted this morning and the emerging market and high yielding currencies are moving higher. The Brazilian real was off a bit yesterday, snapping a 2 day gain, but it is the big winner this morning pushing almost 1% higher vs. the US$. The South African rand, Australian dollar, and Swiss franc round out the top performers vs. the US$ this morning.

We have a lot of data out this morning in the US, with Retail Sales expected to show a slight increase and the weekly jobless claims expected to be unchanged (more on the jobs data in the closing paragraphs). We will also see the business inventories data for November which is expected to show a small increase as Christmas sales weren't as strong as expected. Finally, the Monthly Budget Statement will probably show the US slipped $83.7 billion further into our debt hole in December. None of this data would seem to support a stronger dollar, so I think the moves we have seen in early trading will probably continue through the rest of the trading day.

Then there was this. Both Chuck and Mike Meyer, knowing I was writing this morning, gave me some pfodder for the Pfennig. And both of them were thinking along the same line as their contributions were very similar (I guess great minds think alike!). Mike left me a stack of 4 different news stories which all seem to contradict the latest jobs data put out by our administration. Archer Daniels Midland Co. announced plans to cut 1,000 jobs or 3% of its workforce yesterday, MetLife Inc. said it will shut down its home mortgage origination operation costing close to 4,300 employees their jobs, an analyst on Bloomberg yesterday predicted banks and other financial firms would shed 150,000 workers by the middle of 2013, and finally, St. Anthony's Medical Center here in St. Louis said they were laying off 85 workers. These were stories which Mike found on Bloomberg yesterday, and all would certainly indicate that the labor market here in the US isn't going to improve too quickly. Chuck was also thinking about the job market, and sent me the following:

Well. did you hear about this? Hostess Brands filed for Chapter 11 bankruptcy protection Wednesday, a move that marks the second significant court restructuring for the Twinkies and Wonder Bread baker in the past several years.

The privately held Irving, Texas, company, which employs roughly 19,000 people and carries more than $860 million in debt, has been facing a cash squeeze amid high labor costs and rising prices for sugar, flour and other ingredients.

Hmmm. how can they be experiencing rising costs for sugar, flour and other ingredients, when the Gov't tells us there is no inflation? And The Fed Chairman tells us that the inflation we're seeing is "temporary". Hmmm. Hostess Cup Cakes, and an RC Cola, on my way home from baseball practice at the confectionary around the corner from my house, were a staple.

Well... The Fed Beige Book was put out there for us all to view late yesterday afternoon... among the hootin' and hollerin' about how the Fed districts all showed stronger economic activity and consumer spending in the 4th QTR... there was this ditty... Overall inflationary pressures were noted to be "very limited" as the upward pressure from rising commodity and input prices eased substantially.

Hmmm... again... tell that to the Hostess Cup Cakes and Twinkies people!

Thanks to both Chuck and Mike for their contributions this morning. An election year always brings out the spin masters, and we will probably see a lot of data which just doesn't seem to match up with reality.

To recap. The euro was off yesterday as the ratings agencies and expected inaction by the ECB worried investors. But the euro moved higher this morning after a successful bond auction in Spain. The BOE will be meeting today, and some expect them to extend their latest round of QE. Currency traders tested the remaining members of the SNB, but the franc remained above its 1.20 floor vs. the euro. Data out today could lead to further dollar weakness, as the weekly jobs numbers are expected to disappoint. And both Chuck and Mike gave me stories which show the layoffs continue here in the US.

Currencies today 1/12/12. American Style: A$ $1.0363, kiwi .7975, C$ .9845, euro 1.2756, sterling 1.5352, Swiss $1.0539. European Style: rand 8.0310, krone 6.0156, SEK 6.9335, forint 240.58, zloty 3.4740, koruna 20.0275, RUB 31.6275, yen 76.86, sing 1.2887, HKD 7.7684, INR 51.5837, China 6.3181, pesos 13.5432, BRL 1.7865, Dollar Index 81.064, Oil $102.13, 10-year 1.92%, Silver $29.66, and Gold. $1,630.80

That's it for today. My son will be happy today, as I just received a call from his school telling me he has a snow day. No word from my daughter's school, but I'm pretty sure from the look of the highway below that most schools in St. Louis will be cancelled today. Hard to believe after we had temps in the mid 50's yesterday, but that is typical St. Louis weather! I hope Chuck's plane will be able to make it down to Florida without too much of a delay, I know he is looking forward to getting some sand between his toes. Blues have a very big game tonight at home vs. the Canucks. I think I have a lot to do with how well the Blues are playing as I didn't renew my tickets this year (after 20 years!) and I told everyone at the beginning of the season that this would be the year the Blues make it to the Stanley cup! But I'm still a huge fan so GO BLUES!!! Thanks for reading the Pfennig, and I hope everyone has a great Thursday.

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 01-12-2012 11:27 AM by Chuck Butler
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