The European session gets under way with the main equity benchmarks showing an average gain of 0.6%. The markets will be alert to the Treasury debt auctions by Spain and France this morning, meanwhile any progress in talks between Greece and private bondholders will be welcomed.

There are reports that Germany is opposed to applying a haircut on the Greek debt held by the European Central Bank (ECB). Germany and the ECB have stood their ground on not accepting any losses. Such action would require capital injections with German's Bundesbank being the main guarantor. Yesterday, rumours about a Greek agreement along with positive manufacturing data in Europe and the US were the bullish catalysts.

In the foreign exchange market, the euro has declined versus the majors while the dollar and the yen rose. The euro/dollar corrected towards 1.3130 after turning around at the resistance at 1.3200. The euro/yen was trading above 100 and the dollar/yen was relatively unchanged at 76.10. It is believed that the Bank of Japan may intervene if the dollar/yen falls below 76. The pound/dollar (otherwise known as the cable) has consolidated above 1.58. The kiwi and the aussie were flat against the dollar and the yen.

In the sovereign debt market, the German-to-periphery bond yield differentials remained steady ahead of debt auctions in Spain and France. The Spanish Treasury is looking to issue €3.5-4.5bn in three- to five-year bonds while France looks to issue €6.5-8.5bn in longer term debt.

The Spanish risk premium stood at 307 basis points this morning, while Italy's was at 387bp and Portugal's was at 1,352bp. Portuguese bonds prices improved after rumours of an ECB intervention. The 10-year yield on a German bund was at 1.85%, the French 10-year at 3.06%, the Spanish 10-year at 4.92%, and the Italian 10-year at 5.72%. Meanwhile, the borrowing rate on a US 10-year bond was at 1.84% and the 10-year UK gilt yield stood at 2.07%.

Looking at the macroeconomic agenda, the trade balance for Australia in December showed a greater-than-expected surplus of A$1.709bn. The commodity cycle and China's soft landing was also helping Australia. There will be PMI construction data in the UK and producer price data in the Eurozone. In the US, there will be data on weekly unemployment claims, non-agricultural productivity and labour costs. Yesterday's positive auto sales data for January stood out as 14.13m units were sold compared to the previous 13.48m.

Chicago Federal Reserve president Charles Evans will make an appearance today and Fed president Ben Bernanke will meet with the House of Representatives Budget Committee.

FM

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