Market Update as Risk Off contagion spreads in Europe
Markets have been selling off for the past 30 minutes. Renewed fear of the Italian disease is spreading in Europe. Italian spread spiking higher, banks shares selling off aggressively, while the yield curve is inverting. Just as we wrote earlier this weekend, “Italy’s problems are not solved by Silvio resigning”. The Euro is trading close to 1,35, while the MIB index has fallen 6,2% compared to yesterday’s highs…With volumes rather light, expect volatility to stay high, as no “serious” investor can manage to hedge effectively. Important charts below.
Yields, yields and some more yields
What’s the focus of investors in this market? The stock market has been living it’s own dream, while many of the credit markets imply a slightly different picture of the Economy. Today we got the Spanish rates trading above the 6% level again. Italian rates are also spiking higher again, and we expect the 7% level to be breached shortly. Irrespective of what you think about the market here, people have clearly woken up to that yields do matter.
We have a new President. Mario Monti.
- MARIO MONTI THANKS NAPOLITANO FOR OFFER TO FORM GOVERNMENT
- MARIO MONTI SAYS ITALY MUST BE PROTAGONIST IN EUROPE
- MARIO MONTI SAYS HE’LL ACT TO SAVE ITALY FROM CRISIS
From Wikipedia; Mario Monti holds a degree in economics and management from Bocconi University, Milan. He completed graduate studies at Yale University,where he studied under James Tobin, the Nobel prize-winning economist.
He taught economics at the University of Turin (1970-85) before moving to the Bocconi University, of which he has been rector (1989-1994) and then president (since 1994). His research has helped to create the Klein-Monti model, aimed at describing the behaviour of banks operating under monopoly circumstances.
Monti is the first chairman of Bruegel, a European think tank founded in 2005, and he is European Chairman of the Trilateral Commission, a think tank founded in 1973 by David Rockefeller.He is also a leading member of the Bilderberg Group.
Monti is an international adviser to Goldman Sachs and The Coca-Cola Company.
Julius Caesar is gone. Did Berlusconi just pull another Putin move?
It has been a rather hectic weekend in Italy. With Berlusconi’s resignation, many wonder what is the future of Italy. Is the nations biggest problem solved? We doubt it very much. The increasingly likely outcome is that Berlusconi pulled a Putin move. Replaced himself, but will still rule the country from his Villa. Don’t forget, Silvio is one of the richest persons in Europe, and has been around for two decades. By Al Jazeera, courtesy Silvio.
For the Sunday evening Live speech click here.
Arrivederci-Silvio ends ruling Italy after almost two decades
One of Europe’s “biggest” politicians and rulers has today resigned. Grande Silvio resigns on his own TV channel after leading Italy for almost two decades. We doubt this will fix Italy’s problems long term. Irrespective of what one thinks of Silvio, we can only conclude; Europe is changing, very fast. From the Guardian;
Italian prime minister Silvio Berlusconi confirms his resignation in a phone interview on his own channel after the approval of a budget law. The 75-year-old billionaire, the Italian republic’s longest-serving prime minister, went to see president Giorgio Napolitano after watching his support in the lower house of parliament fall well below the number required for an outright majority. His control of parliament had become a crucial element in the eurozone’s raging debt crisis as investors in Italy’s debt fretted over the country’s ability to implement the austerity measures needed to cut its deficit
Silvio’s speech below:
Troubled Currency
So, what’s going on in Europe? We are faced with constant news regarding the euro, who is running what country and contagion spreading to core Europe. The amusing part, in the middle of the Euro collapse, is today’s quote out of Romania, “we still aim to join the euro…”. What will happen is very hard to predict, but we are reaching the inflection point. Spiegel’s take on the new Euro zone;
Economists across the Continent have been warning about it for months. Now, the European Union too has said that a recession in the euro zone has become a distinct possibility. “Growth has stalled in Europe and there is a risk of new recession,” said European Commissioner for Economic and Monetary Affairs Olli Rehn on Thursday in Brussels. He also said that unemployment in the 17-member currency union will remain stuck at 9.5 percent.
But with Italy facing massive market pressure to accelerate the passage of critical structural reforms — and to put an end to the era of Prime Minister Silvio Berlusconi — the euro zone continues to focus more on survival than on economic growth. And this week, that focus has led to yet another round of debate as to what the future of the European Union might look like.
Full article here.
Italy is the battleground
As Asia joins the Euro sentiment, where Hang Seng is down 5%, expect more volatility ahead. Italy is the epicentre of this “latest” renewed fears. We have been covering the Italian theme for quite some time, and pointing to the many threats we face from an implosion of the countries debt and economy. Italy is simply too big to bail out. Yesterday’s sharp spike in Italian rates, made investors very jittery, especially as the short dated maturities traded higher than the longer maturities, and we got that famous inverted curve.
Bloomberg reports on the Italian developments;
The biggest signal yet that the single currency’s third- largest economy is falling prey to its two-year debt crisis forces German ChancellorAngela Merkel, European Central Bank President Mario Draghi and their peers to decide just how far they’re willing to go to defend the euro.
“The market is testing the commitment of the euro zone’s stewards,” said Eric Chaney, Paris-based chief economist at insurer AXA SA and a former official in the French Finance Ministry. “Italy is the real crisis battleground.”
At 1.9 trillion euros ($2.6 trillion), Italy’s debt exceeds that of Greece,Spain, Portugal and Ireland combined, though unlike those nations, it has systemic importance as the world’s third-largest bond market and eighth-biggest economy. Berlusconi’s offer to quit has still left his nation struggling to produce a government stable enough to deliver austerity after LCH Clearnet SA raised the deposit it demands for trading Italian securities.
…and that inverted curve below.
It will get worse as Italy implodes-08 deja vú anybody?
Majority of markets got absolutely smoked today. Volumes are thin, and all trading dominated by HFT Algos creating pockets of air, irrespective of direction. There is an increasing amount of frustrated fund managers unable to execute their orders in an efficient way. Many markets broke through important short term levels. The Italian MIB index got absolutely slaughtered today, with major banks hitting limits during the course of the day. Italian problems go beyond Berlusconi. The mountain of debt needed to roll over is scaring investors, and the yield curve is now inverted. The hunt has just begun, and if you thought today was bad, it will get worse soon. Some important charts below.
Markets Tank as Italian rates soar. The Berlusconi effect is gone….
Futures all selling off aggressively. Just like we wrote earlier this morning “Investors loading up on ES futures, due to Berlusconi resigning, will face a harsh reality when they realize Berlusconi is not the problem. The fact the Italian spreads and rates have shot up further should make investors very nervous.”.
Well, what has happened since we wrote the above a few hours ago. Futures are off some 20 handles, while the Italian 10 year rate is currently trading at 7,36%. Remember, Ireland was bailed out at 7%. Italy is UNBAILABLE. All pundit, long the market because of Berlusconi, are now regretting those “panic” buys we saw yesterday. Contagion in Europe is unfolding, and Italy is under attack. Next up should be Spain and France. Below are intraday futures levels, and for the “position ” traders, our longer term view is accessible here.
Italy beyond Berlusconi
The market is in full Berlusconi mood this morning again. Investors loading up on ES futures, due to Berlusconi resigning, will face a harsh reality when they realize Berlusconi is not the problem. As we have pointed out, Silvio is probably one of the most powerful leaders in Europe. He is also extremely rich, and loves his power. He won’t be handing over the resignation without a proper fight. Neither the Greek, Italian or the other PIIGS problems are because of one leader.
The fact the Italian spreads and rates have shot up further should make investors very nervous. With spreads breaking new highs, bond vigilantes, are in control. Credit is implying a different story in Italy, than that all will be fine after Silvio resigns. The massive Italian bond market is suffering, and this won’t be fixed by Silvio resigning. Italy’s 1.9 trillion euros ($2.6 trillion) of debt is the world’s fourth-largest, behind the U.S., Japan and Germany, and more than that of Greece, Spain, Portugal and Ireland combined. Look for the imminent bond margin hike, and spreads spiking up further. Remember what happened when Ireland and the others reached the below Bond Spread levels….?
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