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Risk Appetite Returns ahead of Portuguese Debt Auction

Markets are trading on a rather upbeat note Wednesday, as confidence continues to return to the European debt markets following today's strong Portuguese auction results.
Risk Appetite Returns ahead of Portuguese Debt Auction

Markets are trading on a rather upbeat note Wednesday, as confidence continues to return to the European debt markets following today's strong Portuguese auction results.

This confidence was helped as Japan released further details of its planned support for the new Eurozone bond, saying it will buy up to 20% when issued, raising optimism that other international investors may also come forward as potential buyers.

The Portuguese auction today has been viewed by many as a litmus test on the country's ability to raise financing, and as such was seen as a potential signal for any need for Portugal to undergo a bailout designed to halt Eurozone debt contagion. Similar auctions are also expected from Spain and Italy this week, although Portugal is really seen as the possible weak link at this stage in what could signal the start of either a European recovery, or a second wave of problems for the trade bloc.

Although the Portuguese auction results have taken much of the focus on both sides of the Atlantic, the US economic calendar still has some numbers of note to put forward today, starting with the MBA Mortgage Application Index at 0700 EST. This is followed by Import/Export Price Index data at 0830 EST, TIPP Economic Optimism Index data at 1000 EST, EIA Crude Stocks at 1030 EST, finished off by the Beige Book and the Treasury Statement both at 1400 EST.

Stock markets are benefiting from the air of optimism today, with US stock futures pointing to a positive open as European bourse lead the way. The natural resource sector is helping support prices today, as commodity prices push higher, with Brent crude almost at the key $100/bbl level.

In the financial sector, AIG has agreed to sell its Taiwan life insurance unit to a consortium of local industrial groups for $2.16 billion. This is its second attempt to divest the unit, called Nan Shan, and comes as part of the effort to repay the government bailout funds it received during the financial crisis.

Though Portuguese auction results did come in fairly strong this morning, one could argue with all the attention focused on them, the EB and Portuguese governments would not allow them to have failed, with the IGCP selling €650 million of the Oct 2014 OT, at an average yield of 5.396% and covered 2.6 times. The June 2020 OT raised €599 million, covered 3.2 times with an average yield of 6.716%. Core safe haven bonds, including US Treasuries, saw money flow away today and into the riskier assets, leading yields to climb a few basis points for most of the benchmark paper.

The strong results and broader optimism in Europe has actually done very little to help the single currency today, which has pulled back against the dollar and is now lower on the day. The Australian dollar, meanwhile, is continuing to hold near the one-month low hit yesterday, as the flood waters spread to more urban areas in Brisbane, suggesting the worst of the financial damage is not yet over.

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