Archive - Nov 28, 2011

Banks and ratings companies are sounding their loudest warnings yet that the euro area risks unraveling unless its guardians intensify efforts to beat the two-year-old sovereign debt crisis.

• According to La Stampa, the IMF is preparing a EUR 600bln loan for Italy, in case its debt crisis worsens, although the report was swiftly denied by IMF officials
• Several papers reported that Germany is considering the option of joining the five other AAA-rated Eurozone member states to issue common bonds. However, the German finance ministry dismissed the report later in the session
• Particular narrowing was observed in the Belgian/German 10-year government bond yield spread partly after Belgian negotiators reached an accord on the country's 2012 budget during the weekend, together with well received OLO bond auctions from Belgium

• Welcome LSAP: Dealers See Fed Buying $545B Mortgage Bonds (Bloomberg)
• And more central planning: Central Banks Ease Most Since 2009 to Avert Contagion (Bloomberg)
• Italy’s PM in austerity race, IMF denies in aid talks (Reuters)
• OECD Cuts Growth Forecasts, Blames Euro Crisis (Bloomberg)
• Thanksgiving Weekend Sales Set Record (Bloomberg) - we give this story one week before the truth comes out
• China Eyes European Assets (Reuters)
• US Urges Speedier Action on Debt Plight (WSJ)
• Chinese Profit Growth Slowing as Real-Estate Curbs Bite (Bloomberg)
• China Vice Premier Says Property Curbs to Stay, Xinhua Says (Bloomberg)

The La Stampa rumor that the IMF would bail out Italy has come and gone, roundly refuted by none other than the IMF as expected, but not before lifting futures by over 30 points in the premarket session, and setting a very favorable tone to the market overnight. How long it lasts now depends on the amount of time it takes the bipolar market to realize that the tapped out consumer, already at near multi-year lows in savings, will be unable to carry this holiday period despite what the Retail Federation reported about supposedly record Black Friday sales. But for now all is forgiven and not a moment too soon: after all S&P had just downgraded Belgium which was coming to market with a new 10 year bond issuance. And courtesy of the US consumer, the auction was not a failure, yet still pricing over 1% higher compared to a month ago, or at 5.659% compared to 4.372% on October 31. Still, the bid to cover rose, and thus the modestly successful auction saw the 10 year yield drop 16bps to 5.7%, the biggest decline in a month and the first in 6 days; hit 5.91% earlier, highest since  2000. Just shortly before Belgium, Italy sold €567MM in 2.6% 2023 Inflation Linked linkers at a bid to cover of 2.16 but most importantly at a yield of 7.3%. This was an epic collapse compared to the last such issuance from October 27 when 2.1% I/Ls due 2021 priced at a 2.14 B/C and a 4.61% yield: nearly a 2.7% increase. And somehow this unsustainable yield (not to mention another BTP auction tomorrow) is considered a good thing: the 10 Year dropped to just over 7% in the auction aftermath after hitting 7.3% earlier. And for now Europe is on the backburner with all eyes on how few contracts of ES can get the S&P up 3% today: all signs of a perfectly functioning market.

All you need to read.

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