Spanish bond yields contain risk appetite

09.47 AEST, Tuesday 17 July 2012

Spanish bond yields contain risk appetite in international markets

By Ric Spooner (Chief Market Analyst, CMC Markets)

The Australian market appears set for a quiet day after international share markets failed to follow through on Friday’s strong rally.

Risk appetite is being contained by Spanish bond yields which remain stubbornly high. The fact that Spain’s 10 year bond yield is at 6.82% is probably the single best indicator that while the Euro leaders’ summit contained things in the short term, market concerns over the situation in Europe remain elevated.

The US retail sales figures released last night are a reminder of the negative impact that concerns over Europe have had on international consumer activity. On a six month rolling average basis, consumer spending in the US is doing little better than rising in line with inflation. Australian retailers may have fared a little better recently, with Woolworths confirming they have seen a sales bump following the government carbon tax handouts. While helpful, investors are likely to see this as a temporary effect that won’t do much to change sentiment toward the retail sector. Local investors will also be monitoring June care sales figures today. This is one of those sectors of the Australian economy which has been defying expectations and improving solidly over recent months.

The sharp gains in US grain prices over recent weeks will place upward pressure on food inflation in coming months. However, central banks are generally likely to look through this when setting monetary policy as long as inflationary pressure is limited to the non-discretionary food sector.
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