Overnight Sentiment Unhappy As Europe Is Broken Again: Italian Yields Soar

Tyler Durden's picture

While the market will do everything in its power to forget yesterday's Hung Parliament outcome ever happened, and merrily look forward to today's Bernanke testimony (first of two) before the Senate, Europe is not quite so forgiving. Because moments after today's Italian Bill auction in which the now government-less country sold €8.75 billion in 6 month bills at a yield of 1.237% nearly double the 0.731% yield for the same issue previously, things went bump in the night, leading Italian 2Y yields to surge +38bps to 2.086%, vs 2.063% earlier, while the benchmark Italian 10Y yields soared +28bps to 4.766%, vs 4.739% earlier, and just shy of JPM's 5% target. Spain is not immune from the Italian developments, and while it will take the market some time to realize that the next political scandal may be dropping this time in Spain (as reported yesterday), the Spanish 10 Year is already up 7% to 5.23%. Suddenly talk of parity between Italy and Spain may be on the table all over again. And while unlike yesterday there is US macro data, in the form of US consumer confidence, new homes sales and house price data, all the market will care about is soothing Wall Street sellside spin that Italy is not really as bad as everyone said it would be if precisely what happened, happened. With the EURUSD on the verge of breaking down the 1.3000 support, it is very unclear if they will succeed.

And just in case they fail, the French Industry Minister Montebourg, made infamous from his Titan CEO series of letters, already has a solution - the same solution to everything - as he says the ECB should monetize debt. His goal - to lower the EURUSD.

France's industry minister Tuesday called for a lower euro and said the European Central Bank's role should be reinterpreted, wading back into a currency debate that had been calmed by an agreement between the world's top finance ministers earlier in the month to refrain from competitive devaluations of their currencies.


"I am for a less-strong euro," Arnaud Montebourg said at a meeting with journalists in Paris, adding that it is "good news" the euro has recently declined against other currencies.


The single currency has fallen around 4.6% against the U.S. dollar since the beginning of February.


"I am very happy, [the decline] should continue," Mr. Montebourg added.


Still, the industry minister also said Tuesday the role of the European Central Bank should be reinterpreted. The Frankfurt based institution's primary mandate is to fight inflation, but Mr. Montebourg said that within the current European treaties the ECB can be more pragmatic and less dogmatic. It should act more like other major central banks, which Mr. Montebourg said had monetized debt.

Luckily the world has no currency wars to worry about, or at least the Italian elections pushed them off the front-burner.

What else? from Bloomberg:

  • Treasuries gain for a second day, with 10Y yields breaking below 50-DMA, 5Y and 7Y yields declining to just above 100-DMAs following inconclusive Italian elections.
  • Bernanke delivers semiannual testimony on monetary policy to Senate Banking Committee; his efforts to rescue economy could result in more than a half trillion dollars of paper losses on the central bank’s books if interest rates rise abruptly from recent levels
  • EUR/USD at 1.3097 after yesterday’s 1.1% decline to as low as 1.3048; Italian stocks slide 4.5%, bond yields surge as Italian party chiefs began jockeying to forge a coalition of rivals, head off a second vote; Bersani and Berlusconi may be seeking to avoid a ballet that would favor populist  Beppe Grillo
  • Japan’s government bond yield curve is pricing in the success of Haruhiko Kuroda in adopting more aggressive easing as the next Bank of Japan governor and his ultimate failure to hit a 2% inflation target
  • There isn’t a measure of money in the U.S. that is forecasting worse times ahead as lawmakers voice alarm that the automatic spending cuts  scheduled to begin March 1 may damage the economy
  • BofE Deputy Governor Paul Tucker said he’s open to adding to asset purchases, suggesting Governor Mervyn King’s defeated push for more stimulus is gaining traction with his colleagues
  • Week’s auctions continue today $35b 5Y, yield 0.768%, WI trading yields 0.788%. Yesterday’s 2Y drew 0.257%, just below 0.26% WI level
  • Nikkei falls 2.3%; European stocks slide,  U.S. equity-index futures gain. German, U.K. bonds rise. Energy, precious metals lower

Quick market recap:

  • Spanish 10-yr yield up 7bps to 5.23%
  • Italian 10-yr yield up 29bps to 4.78%
  • U.K. 10-yr yield down 7bps to 2.01%
  • German 10-yr yield down 8bps to 1.47%
  • Bund future up 0.86% to 144.75
  • BTP future down 2.98% to 109.17
  • EUR/USD up 0.16% to $1.3084
  • Dollar Index up 0.11% to 81.76
  • Sterling spot down 0.17% to 1.5137
  • 1-yr euro cross currency basis swap down 1bps to -24bps
  • Stoxx 600 down 1.2% to 284.94

And the comprehsnsive overnight summary from JPM's Jim Reid

As of now the centre-left coalition led by Bersani is set to take control of Italy’s lower house, taking advantage of the majority premium where 54% of seats are allocated to the winning coalition regardless of the victory margin. The Bersani coalition took 29.6% of the vote, enjoying the slimmest margins of victory against the Berlusconi coalition (29.2%). The Five Star Movement came in third with a fairly stunning 25.6% of the votes. The Monti coalition trailed a distant 4th with 10.6% (Bloomberg, citing Interior Ministry data)

Meanwhile in the Senate, it is becoming a near certainty that no grouping will gain a majority. As it stands, with close to 100% of the vote counted, Bersani’s coalition (31.6%) leads Berlusconi (30.7%), the Five Star Movement (23.8%) and Monti’s coalition (9.14%).

Indeed one of the stand-out features of the poll is that Mr Monti polled at only around 10% nationally. It’s fair to say that his policies/views would have been supported by virtually all the main EU players, including the ECB. Yet only one in ten Italians are prepared to back him. Since the ECB stepped up a gear last year, politics was always going to be the key issue for whether they could truly rescue Europe. The voters have certainly made it clear that they are not prepared to accept the combination of austerity and negative growth that the EU's policies have encouraged. Either Europe needs to change its bias or the voters will cause major issues going forward.

Late on Monday politicians were already calling for another poll to break the deadlock, while others expressed the fear that the Five Star Movement would only gain in strength if another election was called which might prompt Bersani to try to form a Government somehow. Angelino Alfano, the People of Liberty secretary, said that the lower house result was within the “margin of error” and demanded a review of the results (FT). According to newswires, should new elections be necessary it is possible that the Italian President could appoint a caretaker PM to change the electoral law to increase the likelihood of a definitive result in a new election, but it is worth noting that the parties were unable to agree modifications in the electoral law last year. Overall it now looks like we will get our “risk-off” February we've been expecting due to the Italian elections but our view of a “risk back on” March now looks threatened by the prospects of a stalemate and weeks of uncertainty in Italy.

Across the Channel, there was some respite for sterling after the UK's downgrade with it gaining 2.5% against the euro from the intraday lows yesterday helped by the risk aversion late in the European session. The pound closed with a gain of 0.97% and is adding a further 0.3% in Asian trading.

10yr Gilts also rallied by 8.5bp from the day’s highs to close at 2.08% yesterday, a lower level than where they last trading before the Moody’s downgrade on Friday.

The risk-off trade prompted an aggressive day of buying in US Treasuries. The 10-year UST yield fell 14bps from the intraday highs to close near its lows of 1.864%. This is perhaps also a reflection of market positioning given the much debated topic of the Great Rotation trade lately. The VIX index erased all of its 2013 move with a sharp spike overnight (+35%) while in credit the CDX IG widened 4bps and we are back to roughly where we were at the start of the month.

Asian markets are following the US lead lower overnight with the Nikkei (-2.3%) taking the lead on a JPY rebound (the yen rallied 1.7% yesterday). The Japanese government is expected to present to the Diet its candidates for the BoJ governor and two deputy governors on Thursday or Friday of this week according to the Nikkei.com. Elsewhere the Hang Seng and KOSPI are -0.89% and -0.47% lower respectively. There are some overnight reports of near-term Chinese macro tightening which is not helping sentiment overnight (China Securities Journal). However Chinese equities are managing to buck the regional trend by erasing earlier losses to trade relatively flat on the day. The weaker overall tone has also brought about more balanced flows in Asian credit although the key indices are still 2-3bp wider on the day.

Bernanke’s semi-annual testimony to the Congress will be a key event today. The Chairman will testify ahead of the Senate Banking Committee today (3pm London) before doing the same before the House Financial Services Committee tomorrow. Our US economists are not expecting the Chairman to express a meaningful change in viewpoint at this juncture due to lingering uncertainty about the economic outlook but given the increasing focus  around the ‘tapering’ of QE, his words will be closely followed. On that note it’s perhaps worth highlighting a WSJ article by Jon Hilsenrath yesterday who concluded that the fact that Fed officials are talking about tapering and exit doesn’t mean that they are about to turn off the spigot. Many officials still want to keep the Fed’s pedal pressed on the floor – an analogy used by Fed’s Yellen recently. Note that our Peter Hooper thinks that assuming the recent firmness of payroll growth continues he expects the Fed to downshift and eventually end its asset purchases during 2H of this year.

Outside of the Italian elections and Bernanke's testimony, we also have US consumer confidence, new homes sales and house price data to look forward to today. The US treasury will also auction $35bn in 5yr notes. But in reality, this will all be a sideshow to the developments unfolding in Italy and Washington.

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IMA5U's picture

Da Bearz are Eating Italian

GetZeeGold's picture



It's deja vu all over again - Yogi Berra

francis_sawyer's picture

Help us Obi Wan Bernanke ~ You're our only hope...

lolmao500's picture

Italien Uber Alles!

10 Foreclosure Horror Stories That Will Blow Your Mind


Greece: "A promise from the army has been obtained to not intervene against a civil uprising"
“At a certain moment, quite soon, there will be an explosion of social unrest. It will be very unpleasant,” he says, referring to 15 armed incidents in the previous ten days. In the past few weeks, offices of the governing parties have been firebombed as well as the homes of pro-government journalists. The headquarters of the prime minister's conservative New Democracy party was machine-gunned, and days later a bomb exploded at a shopping mall belonging to the country's second wealthiest citizen, although no one has been badly injured by the attacks.

“It is an escalation of activities,” he worries, adding that he expects the "explosion" to occur sooner rather than later. He predicts the spark will be when new, retroactive and sizeable tax bills come due in the coming months that people simply cannot pay. “There will be further increases in armed actions. There will be bloody demonstrations.”

“We do not have six months. If the EU is going to change something, they need to change it yesterday. We even have problems burying the dead because people cannot afford the funeral expenses.” Refrigerators in the morgue were filling up with bodies until the church said that it would offer free burial for some families.

“We are heading down the road of destruction.”


Very bullish for Europe's stability...

tallen's picture

Goldman slashes 2013 outlook for gold to $1600. That's it, time to buy with both hands!!!



Racer's picture

And jump in with both feet if goddam suckers say that

EscapeKey's picture

do you hear that? that's the sound of two billion indians and chinese, who collectively on the back of goldman's unashamed marketing have decided to sell all their precious metals.

goldman have literally that much sway in those markets. good thing they're not the primary consumers of the world's gold production or anything.

francis_sawyer's picture

Wait until they come out with their BUY rating on bitcoins...

Terp's picture

"negative growth"



EscapeKey's picture

Has anyone thought of perhaps solving this problem through printing some money?

I know, I know - completely radical idea, and certainly not one the hawks in charge of the world's central banks should take lightly. But their *strict* monetary policies (only 10% annual M1 growth *shudder*) is clearly choking off an otherwise strong recovery, in this world of low debt/GDP rates.

Ghordius's picture

about as radical as delivering the cash per helicopter drop to the population instead of entrusting it to the banks - I wonder why nobody ever thought about that

Dead Canary's picture

Hey gang, I know. Let's put on a show! There are costumes in the barn, and my dad knows music.....

lolmao500's picture

In other bullish news...excuse me... VERY bullish news...

Obama to Inform Netanyahu of Plans for Summer Iran War

Will Urge Israel to 'Sit Tight' And Let US Start War

According to unnamed officials quoted by Israel’s Channel 10, President Obama is planning to inform Israeli Prime Minister Benjamin Netanyahu of his intention to attack Iran this summer, with June beginning the “window of opportunity” for his next war.

Secretary of State John Kerry said in a press conference earlier today that time is “running out” for diplomacy, and it seems that the next P5+1 talks are being set up as the “last chance” for Iran to give in to assorted US demands before being attacked.

President Obama will reportedly inform Israel of this decision during his upcoming visit next month, and will ask Netanyahu to “sit tight” and stop talking up the war for a few months until the US can get it off the ground unilaterally.

The US has been setting the stage for a June war since last year, when Obama had likewise reassured Israel in the lead-up to elections that a US war would be launched by June 2013, an effort to keep Israel from starting the war ahead of the US vote.

EscapeKey's picture


WAR is a racket. It always has been.

It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small "inside" group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes.

--Major General Smedley Butler

Ghordius's picture

rackets and bands is what humans form - throughout history. fish form schools, humans band

war is nothing else than one human band getting more forcibly after another band, while racketeering is what goes on during peace

and public debt is what is usually left after a war or after a long "peace-racket" period

actually even fiat money is nothing else than an instrument of war (or peace-racketeering)

and yet the only way for any majority of the people to protect themselves from bands and racket is to form protective groups - the other half of politics

EscapeKey's picture

at least that's the theory.

sadly, however, 90% of the people walking the earth are god damn morons, who will take the bubblevision's word for just about anything.

faced with a willingly brainwashed public, those awake to the lies, fraud and deceit really have very few options...

Winston Churchill's picture

IV will not work.

4 inch needle into the heart with conc, QE might,but the patient is brain dead..

Shevva's picture

At least you can buy cheap German cars, who gives a frig in the Euro about any other country than France and German, no one thats who.

Funny I was going to make a sarcastic comment about running a book on who will default first but I'm sure theres a financial instrumental already setup for this.

Funking bookies.

Edward Fiatski's picture

Cheaper Mercedes, bitchez. Oh wait... I deal in Euros. FML? Heh.

Notarocketscientist's picture

When discussing Israel we need to look at the root cause of the conflict - have a look at this video The Israeli General's Son – the video Israeli does NOT want you to see was made by the son of the general who lead the 73 Israeli offensive - and later turned against Israel's foreign policy

A real eye-opener, pass this around http://www.youtube.com/watch?feature=player_embedded&v=TOaxAckFCuQ

Racer's picture

And just look at those US futures go... just shows how fake this 'market' is!

Sudden Debt's picture

I'm for a euro that's still able to buy food.... or are they also against that?

Ghordius's picture

food produced in the eurozone or imported? another reason why big currency zones have a clear advantage versus small ones during currency wars

think about that while you eat oysters from Normandy, Angus beef from Ireland, veggies from the Netherlands, etc. etc.

Sudden Debt's picture


Spain, America, South America... and fish from Canada and Alaska.


Hongcha's picture

General Smedley D. Butler U.S.M.C.

StychoKiller's picture

Will someone over at the ECB pass the bowl of crazy pills, I'm feeling kinda left out here!

dadichris's picture

Despite many convincing articles on ZH over the past 9 months showing how their days were numbered - Greece, Spain and Italy are still in the Eurozone. WTF?

Financial Consulting's picture

Mr. Bernanke’s prepared testimony contained no major surprises, reiterating that highly accommodative policy would continue until unemployment fell significantly and that the potential gains from this stance outweighed the potential risks. He also underscored that the FOMC believes that the Q4 pause in growth was temporary and that the expansion would continue at a modest underlying pace incoming quarters. All in all, there was nothing here to suggest and early tapering off of QE, much less an early end to such. Financial Consulting