Mid-Day Report: Euro Extends Pull Back on Greece, French Transaction Tax

Euro extends its broad based pull back as it’s looking unlikely that Greece would agree on anything solid today ahead of the EU summit and the negotiation would possibly drag on for at least a few more days. Meanwhile, Greek Finance minister Venizelos firmly rejected Germany’s proposal for EU to take control over Greece’s budget on national sovereignty. Risk markets are also facing some pressure from selloff in European banks stocks. Dollar index managed to recover but after all it’s still staying well below 80 psychological level. US equities are set to open lower today and DOW is expected to extend it’s pull back after failing 12876 key resistance last week.

Bank stocks led European markets lower after French President Sarkozy said that France will unilaterally impose a 0.1% transaction tax from August onwards. EC has been proposing a 0.1% tax on equity and bond transactions and 0.01% tax on derivatives. However, that’s not confirmed yet as EU finance ministers will be discussing it in March. Sarkozy has been impatient on dragging on this issue and stepped up it’s campaign. However, the tax, being a France only levy, is facing strong opposition from the financial sector in the country. The French Banking Federation said earlier this month that “A tax that’s limited to France would weigh on growth, lead to a loss of competitiveness, and create a heavy handicap for the financing of the French economy.”

Italy’s bond auctions were well received today just after it’s downgraded by Fitch by 2 notches to A- from A+ last week. Italy raised EUR 7.5b, near the top of its maximum target. EUR 2b of benchmark 10-year bond was sold with yield at 6.08%, impressively down from December’s 6.98%. Bid-to-cover ratio was at 1.4 times, not spectacular though. The country also sold EUR 3.57b of 5-year bonds today with yield at 5.39%, sharply lower than prior auctions’ 6.47% in December. Also, EUR 1.9 b of 2016 and 2021 bonds were sold. Belgium will sell EUR EUR 1.8b of 105-day bills and EUR 1.2b of 168-day debt tomorrow. Germany will sell EUR 5b of 10 year bonds on Wednesday. France will auction October EUR 8.3b of bills today and October 2018, October 2020, and April 2022 debt on Thursday. Spain will sell as much as EUR 4b of July 2015, October 2016 and January 2017 bonds on Thursday.

On the data front, US personal income rose more than expected by 0.5% in December while spending was flat. Headline PCE moderated to 2.4% yoy versus expectation of 2.3% yoy. Core PCE accelerated to 1.8% yoy. Eurozone confidence indicators were mixed in general.

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