Another European Market Implosion On Weak Italy Auctions, Tremonti Resignation Rumors, Deteriorating Economic Data And Earnings Misses

Tyler Durden's picture

On the one week anniversary of Europe's second bailout one may be tempted to ask "what bailout" looking at the across the board deterioration in European market metrics: Spanish 10 Year bonds over 6.00% again, Italy CDS surging to 330 bps, Italy Bunds spreads at 331 just inches away from all time wides of 353 bps, EURUSD plunging by over 100 pips overnight, CAC, DAX, OMX all falling by more than 1 standard deviation as VW, chemical maker BASF, and Credit Suisse all missed earnings estimates, and, of course, numerous Italian banks (don't disappoint us UniCredit) once again on the verge of being halted after plunging by a solid 5-6%. Several reasons for the weakness: i) Italy auctioned off €8 billion in 3,4,7,10 and year fixed and floating rate notes generating weaker than expected results with the 10 year bond gross yield rising to 5.77%, the highest since 2000, and just under the all time record of 5.81%, and the 3 year gross yield of 4.80 pushing to the highest since 2008, ii) more rumors of Tremonti resigning, iii) European retail sales declining for a third month according to Markit, and iv) a decline in Euro-area economic confidence more than estimated, dropping from 105.4 to 103.2, below the consensus of 104.0. German bunds are once again well bid with September futures rising 0.2% to 129.63. But not before rumors of ECB buying peripheral bonds via the SMP spooked bunds lower, with the resulting rise being only a result of the flight from Italy. And putting a cherry on top of it all was ECB's Mersch who once again resumed the old party line, saying that fears of a "premature end to euro are unfounded." And to think that just a week earlier the ECB told us we would never have to worry about the end of the euro.

Below we break down the Italian auction. Recall that as we reported two days ago, the Tesoro decided to scrap its August mid-term auction. Now we can see why.

  • 3-yr auc avg yld 4.8% vs 3.68%, bid/cover 1.31 vs 1.39
  • 7-yr auc avg yld 4.65% vs 3.38%, bid/cover 1.76 vs 1.59
  • 10-yr auc avg yld 5.77% vs 4.94%, bid/cover 1.38 vs 1.33
  • 4-yr auc avg yld 4.58% vs 3.17%, bid/cover 1.79 vs 1.63

Reuters' summary:

Italy's borrowing costs soared on Thursday as it sold nearly 8 billion euros of bonds, with jitters about its debt pile pushing its benchmark 10-year bond yield to the highest in 11 years.


The premium investors demand to hold 10-year Italian debt instead of safe-haven German Bunds widened after the auction and Italy's blue-chip index extended losses as analysts warned Rome could not afford to pay these kind of rates for a long time.


"These are not sustainable levels of yields in the long run," said Marc Ostwald, a bond strategist at Monument Securities in London. 


The auction gross yield on the 10-year bond rose to 5.77 percent, the highest since February 2000 and just a shade under a euro lifetime record of 5.81 percent.


The yield on a new three-year bond jumped to 4.80 percent, the highest since July 2008.


Still, Italy managed to sell nearly 8 billion euros of bonds against a maximum target of 8.5 billion euros -- a sign of healthy demand.


"It is positive that they sold nearly the full amount of BTPs. The bid-to-cover is not great but still in line with the last few auctions," said Alessandro Giansanti, a rate strategist at ING in Amsterdam.


"What's worrying is that the spread keeps rising, and so do the auction yields," he said.


The spread between the Italian 10-year BTP and the German Bund rose to 331 basis points after the auction after hitting a euro lifetime high of 353 basis points earlier this month.

As for the deterioration in Eurozone sentiment:

Economic sentiment in the euro zone worsened more than expected this month with optimism fading in all sectors, data showed on Thursday, signalling slower expansion of the economy in the second half of this year.


The European Commission's monthly sentiment index, based on a survey of businessmen and consumers across the 17-nation euro zone, fell to 103.2 in July from 105.4 in June. This month's figure was the lowest reading since 102.2 in August 2010.


The index has been falling every month since February. Analysts polled by Reuters had expected a fall to 104.0 in July.


"It is a clear soft patch, worse than expected. Bad news, clearly. We are on a downward trend since the start of the year," said Carsten Brzeski, economist at ING. 


The Commission said sentiment in industry worsened to 1.1 from 3.5, in services to 7.9 from 10.1, and among consumers to -11.2 from -9.7.


"Today's data signal that the slowdown is set to continue in the second half of the year. The Composite Purchasing Managers Index for activity released last week showed a similar trend," said Clemente De Lucia, economist at BNP Paribas.


The sentiment data, as well as market jitters about Italy's ability to cope with its sovereign debt, pushed the euro down to around $1.4280 on Thursday morning from $1.4370.

As for Tremonti, we are not sure if he will or will not leave, but based on our on the ground sources in Italy, a major shake up in the Italian government, which may have a far wider impact than just the departure of the FinMin is now imminent.

As we said last week when we summarized the euro bailout: we expect the need for another bailout by the end of the year, and most certainly the forced expansion of the EFSF to at least €1 trillion as Europe has no choice but to increase the size of the ponzi pyramid with each passing day.

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Josephine29's picture

Yes I could see something was going on when I spotted this on my twitter feed.

The Swiss Franc has surged to a new high against the Euro of 1.144 in the last hour. Someone wants a safe haven and they want it badly... @notayesmansecon
ratso's picture

Right you are and the Swiss hate the pressure it puts on them.  

The problem for the euro is that it can't be fixed.  The extent of the problem has been both underestimated and understated by the ECB and the EU.  To make it worse, they have openly confessed to use lying as a method of calming the markets.  So, what they say can not be believed when they give reassurances.  

To make things worse, it will not take much to push Italy into a default position - a new recession plus an increase in rates will probably do the trick.  After that comes the deluge.

Sudden Debt's picture

So far retail sales look terrible.

Saturn has a first time loss which never happend before.

Carefour is bleeding and so does Delhaize....

And don't forget that they are all selling at bleeding margins so most of them can't handle this downfall and yet they all start to discount like crazy.

In Belgium, inflation has run up to 4% officially so if you discount that from their sales numbers you'll realize that volume must have taken a severe beating.



PeeTee's picture

Official and inflation are two words. They shouldn't be used in one sentence.

kaiten's picture

So the rumour thingy was successful, it pushed the yields up. Someone hates the euro very badly.

qussl3's picture

Shit blows up when those that can balance their books have to pay for those that cant.

Or wont.

kaiten's picture

Which country has a balanced budget? I dont know about any. Do you?

qussl3's picture

Singapore should run a surplus this year.

Debt to GDP isnt pretty tho.

EDIT: Whoops, out of context.


You point just reinforces the shitshow the EU is in.


kaiten's picture

Well, at least the US has a prudent fiscal and monetary policy. Someone has to lead ... down to abyss.

disabledvet's picture

hi ho silver. i sense "aggressive Spanish banks" might have a little "surprise" in the sense that they may remain...aggressive.

chump666's picture

german dax down and dow futures up? i don't think so.

youngman's picture

Has anyone figured out why the European Bond markets are failing..but the US bond markets seem to be fine....seems is the key word....I think there is and under the table market for the USA...but they show good auction numbers always...

qussl3's picture

The US problems are like punching yourself in the face, you can stop anytime you want.

The EU is like getting raped by grizzly, you dont really have a say.

luigi's picture

When the Grizzly calls you "friend" and "ally"...

Quintus's picture

I think we need look no further than JPM's derivatives book (What is it now $80 trillion notional?) to understand why there is always a bid under the UST.  It has been clearly identified that there is no end-user for these unbelievable volumes of interest rate derivatives, however they do, by means of their structure, create artificial demand for Treasuries.  

JPM's derivatives book is the black hole at the centre of the global financial ponzi.

westboundnup's picture

Smells like (Credit) Suisse cheese.

Tao 4 the Show's picture

The politicians in Italy ought to be worried if they have to go the austerity route. The country has an enormous number of cars w/drivers for politicians, and these guys are seen constantly on the highways. Either they armor those things, or I think they won't last long. The problem in Italy is not early retirements, etc, but rather corruption in the system and organized crime (it's not just a cliche).

oogs66's picture

The bailout plan is already failing.  It hasn't even lasted a full week.  Once we get the debt ceiling lifted, we can see a bigger sell off. 

eurusdog's picture

fears of a "premature end to euro are unfounded." At least they are now admitting there is an end, even if it isn't pre-mature.

youngman's picture

Even the talking heads on TV can´t figure it out.  I sure as hell can´t.  To Me Gold and Silver should be skyrocketing...its not.  Its not gaining as fast as Amazon or Apple.  A toy seller or a Toy maker.  They will pass the Boehner deal today..and the Senate will tank it..and then a 2.5 trillion deal...probably with some vote buying pork attached will get passed....we will then have 17 trillion in debt......and I also think a downgrade....but the auctions will still be sucessful I think...I just want to know who is buying and why.....I am having a CSI moment....even when I am drunk I would never buy any Treasuries..never...there has to be another story that I am missing somewhere...

Highrev's picture

I'll go out on a limb and say that the selling in Asia and Europe is due to the need to raise cash to cover losses back home in the States.



Troy Ounce's picture


A warning that all those old hippies on Eurorail must remember:

  • E pericoloso sporgersi
  • Nicht hinauslehnen
  • Do not lean out of the window
  • Niet uit het raam hangen

Engraved in my consiousness, now more than ever: Be careful, man. Buy gold

Monday1929's picture

It is called Deflation. Yes, junk me, but this Deflationist is a big believer in Gold and Silver. But they must be traded/hedged, like anything else. Some ZSL on the "Miracle debt ceiling deal" sounds prudent.

(This was supposed to post under the guy wondering why US Bonds are not collapsing and Gold is not soaring)- you guys SHOULD wonder why Gold is not at $5,000 an oz.

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