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Italian Bondage
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News and Views in brief
Economy
Italian borrowing costs reached breaking point on Wednesday after Prime Minister Silvio Berlusconi's promise to resign failed to raise optimism about the country's ability to deliver on long-promised economic reforms.
Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting investors' concerns that they may not get their money back, a fear that also showed up in a jump in the cost of insuring against Italian debt default.
Portugal and Ireland were forced to seek EU-IMF bailouts when their borrowing costs reached similar levels and clearing house LCH.Clearnet sounded another alarm by increasing the margin it demands on debt from the euro zone's third largest country, effectively raising the cost of holding its bonds.
The European Central Bank, the only effective bulwark against market attacks on the euro zone, wasted no time intervening to buy Italian bonds, traders said.
"The ECB is buying in decent sizes," a London hedge fund investor said. "It makes you wonder how much firepower it has. It's scary. The market was a bit naive when Berlusconi left. Now it realizes there's a mountain to climb."
Italy has replaced Greece at the center of the euro zone debt crisis and is teetering on the cusp of requiring a bailout that Europe cannot afford to give.http://www.reuters.com/article/2011/11/09/us-eurozone-idUSTRE7A831520111109
China’s inflation slowed by the most in almost three years, giving officials more room to support growth as industrial production and the property market cool and Europe’s crisis threatens exports.
Consumer prices rose 5.5 percent in October from a year earlier, the statistics bureau said on its website today. The 0.6 percentage point decline from September’s rate was the biggest since February 2009. Industrial output growth slowed to 13.2 percent.
Most economists expect Premier Wen Jiabao’s government to loosen fiscal or monetary policy without cutting interest rates as inflation stays above a full-year target of 4 percent, a Bloomberg News survey showed this week. HSBC Holdings Plc said today that “targeted easing” may include measures to support smaller businesses and the construction of public housing and infrastructure.
“The combination of easing inflationary pressures, a protracted euro debt crisis and a potential property market slump has set the scene for an imminent policy easing,” said Liu Li-Gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. “The time is right” for a cut in lenders’ reserve requirements, he said.http://www.bloomberg.com/news/2011-11-09/china-inflation-eases-to-five-month-low-may-enable-looser-monetary-policy.html
Indexes
European stocks dropped for the third day in four after the spread between Italian and German bond yields widened to the most since the introduction of the euro and Italy’s credit-default swaps jumped to a record. Asian shares rose and U.S. index futures declined.
HSBC Holdings Plc (HSBA), Europe’s largest bank, retreated 5.7 percent. Dexia SA (DEXB) slumped 11 percent as the lender said its shareholder equity shrank because the Belgian government nationalized its unit in the country. Deutsche Post AG (DPW), Europe’s biggest postal service, jumped 3 percent after raising its full- year forecast.
The Stoxx Europe 600 Index fell 2.3 percent to 235.06 at 11:46 a.m. in London. Stocks earlier climbed as much as 1 percent after Italian Prime Minister Silvio Berlusconi offered to resign. The benchmark measure has still rallied 9 percent from this year’s low on Sept. 22 as investors speculated that the euro area would protect the economies of Italy and Spain from the sovereign-debt crisis. http://www.bloomberg.com/news/2011-11-09/european-stocks-rise-as-italy-s-berlusconi-offers-to-resign-metro-climbs.html
U.S. stock futures retreated, indicating the Standard & Poor’s 500 Index will erase two days of gains, as a jump in Italian bond yields signaled Europe’s debt crisis is worsening.
Adobe Systems Inc. (ADBE) tumbled 11 percent in Europe after the largest maker of graphic-design software cut its earnings target. Yahoo! Inc. gained 0.8 percent as Alibaba Group Holding Ltd. and Softbank Corp. were said to be talking with private- equity funds about making a bid for the company.
S&P 500 futures expiring in December lost 2.2 percent to 1,245.5 at 6:13 a.m. in New York. Contracts on the Dow Jones Industrial Average fell 209, or 1.7 percent, to 11,914.
“Italian bonds are within a very, very dangerous zone,” said Alberto Espelosin, head of analysis at investment company Ibercaja Gestion SGIIC SA in Zaragoza, Spain. “Any country paying more than 6.5 percent it just boosts financing costs and makes it hard to reduce deficits. There is high risk aversion and equity markets will reflect this.”http://www.bloomberg.com/news/2011-11-09/u-s-stock-futures-tumble-as-italian-bond-yields-surge-to-euro-era-record.html
Currencies
The euro dropped against the dollar and yen amid concern Italy will join Greece in struggling to form a new regime strong enough to implement austerity measures following the resignation of Prime Minister Silvio Berlusconi.
The euro fell to its weakest against the yen in almost two weeks after LCH Clearnet SA increased the extra deposit it demands from clients to trade Italy’s government bonds and Greek negotiations of forming an interim government stalled. The yen advanced to its strongest versus the dollar since Japan’s Ministry of Finance intervened to weaken the currency on Oct. 31 as concern about further moves waned.
“Though Berlusconi is committed to go, we’ve no idea what will replace him,” said Adam Cole, head of foreign-exchange strategy in London at Royal Bank of Canada’s RBC Capital Markets unit. “And then you have again the negotiations for the replacement prime minister in Greece, which seem to have fallen apart overnight, so the two principal areas of uncertainty that have been harming the euro still aren’t resolved.”http://www.bloomberg.com/news/2011-11-09/euro-plunges-against-u-s-dollar-on-italian-greek-leadership-uncertainty.html
The pound strengthened against the euro after Prime Minister Silvio Berlusconi offered to resign amid record Italian government bond yields.
Sterling rose for the third time in the past four days against the Swiss franc. The Italian 10-year bond yield reached the highest since before the euro’s debut in 1999 after LCH Clearnet SA boosted the extra deposit it demands from clients to trade the nation’s securities. The pound advanced even as the British Retail Consortium said shop-price inflation eased to the slowest this year in October amid flagging consumer demand.
The pound’s gains are “consistent to some extent with a bit of a let-up in risk sentiment, as that tends to favor sterling on balance a little bit more than the euro,” said Henrik Gullberg, a London-based strategist at Deutsche Bank AG, the world’s largest foreign-exchange trader. “Euro-sterling is very much capped by what’s happening in Europe.”
Commodities
The biggest decline in aluminum prices since the global recession means at least 25 percent of the world’s smelters may be unprofitable.
The metal fell 23 percent to $2,121 a metric ton on the London Metal Exchange since May 1 and energy costs gained 15 percent in the past month. Twenty-five percent of production loses money below $2,350 and 50 percent under $2,000, according to estimates by Bloomberg Industries. About 10 percent of output may be shut by the first quarter, said Jochen Hitzfeld, the analyst at UniCredit SpA in Munich ranked by Bloomberg as the most-accurate price forecaster over two years.
Alcoa Inc. (AA), the largest U.S. producer, said last week that a “significant” part of global capacity is marginal. Aluminum Corp. of China Ltd. said in October that prices are close to output costs. When demand and prices weakened in 2009, smelters curbed supply by about 5 percent in the first half of the year, according 21to the International Aluminium Institute. Futures rallied 37 percent in the following six months.http://www.bloomberg.com/news/2011-11-09/aluminum-slump-means-25-of-global-smelters-now-losing-money-commodities.html
Oil declined for the first time in six days in New York after political turmoil in Italy revived concern that Europe’s debt crisis may continue to spread.
Futures fell as much as 1.9 percent after reaching their highest price in more than three months. European equities declined as the cost of insuring against Italian default rose to a record. The euro sank 1 percent against the dollar, reducing the appeal of commodities priced in the U.S. currency.
“Further deterioration of the euro-zone crisis has shifted its focus from Greece to Italy, an economy too big to be bailed out,” said James Zhang, a strategist at Standard Bank Plc in London. “It has spurred a general ‘risk off’ in the market.”http://www.bloomberg.com/news/2011-11-09/oil-snaps-longest-winning-streak-in-a-year-before-u-s-crude-supply-data.html
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The euro fell to its weakest against the yen in almost two weeks after LCH Clearnet SA increased the extra deposit it demands from clients to trade Italy’s government bonds and Greek negotiations of forming an interim government stalled. The yen advanced to its strongest versus the dollar since Japan’s Ministry of Finance intervened to weaken the currency on Oct. 31 as concern about further steroids online moves waned.
I hope that the situation in Italy will be better now, when the prime minister have resigned. Calculator CASCO
A government official may resign, but the debt won't go away. Money talks, and everything else walks.
http://georgesblogforum.wordpress.com/2011/11/02/the-daily-climb-2/
Amusing to watch the barbarous tail risk protection relic dip with the market.
If sanity was the the watchword, you would think there would be enough flight to no counterparty risk to offset necessary liquidation moves.
This is one way to get Greece out of the headlines.
The bond investors are pushing prices on bonds higher, forcing higher yields and in the process they are killing the host.
Then when the host is killed, the investors take haircuts of 50% or better and cannot collect on the CDS insurance because that's been cancelled.
How does that make any sense to anyone?
When the bond investor parasites have killed all hosts, where do they go and what is their paper still worth?
What is the exit strategy, the end game for them?
Dang on the aluminum prices. I'm sitting on 1.5yrs of beer cans.
I guess I'll just hold onto my aluminum, copper and brass until the economy picks back up. /sarc
Recycling is killing the industry.
WE NEED MORE LANDFILLS!
Cue Christine Lagarde and his SDR cavalry riding in to save Europe. </sarc>
This is just Draghi refusing to buy Italian bonds in any large amount to try to force Berlusconi out now vs. Q1...However, if the ECB buying doesn't go large shortly, there is going to be a really large problem...