- Mario Monti was handed the task on Sunday night of forming an emergency government led by technocrats
- The Italian/German 10-year government bond yield spread widened despite a well-bid BTP auction from Italy, as concerns surrounding the Italian debt remained in focus
- According to IFR, European banks are planning to dump more of the EUR 300bln they own in Italian government debt. Also, president of the European Banking Federation said that Europe’s banks need to keep dumping Italian banks
- The EFSF denied a Sunday Telegraph report that it spent more than EUR 100mln buying its own bonds after failing to achieve its funding target as a sale last week
- The Swiss economy minister warned against exerting pressure on the SNB to weaken the currency
The appointment of Mario Monti to form an emergency Italian government allied with stronger than expected Japanese GDP data led to higher close in the Nikkei (+1.05%), however investors remained nervous in early European trade ahead of the Italian 5-year BTP auction, which weighed on European equities. Comments from ECB's Weidmann that the ECB should not intervene decisively in bond markets, adding that monetary policy cannot and must not solve solvency problems of Euro states and banks further weighed on risk-appetite. Weakness in equities provided support to Bunds, whereas the Eurozone 10-year government bond yield spreads generally widened as the session progressed. Particular widening was observed in the Spanish/German spread ahead of the Spanish bond auction on Thursday, together with political uncertainty ahead of a general election on Sunday. Market talk that the ECB is buying the Italian government debt helped the Italian/German spread to tighten somewhat. In the forex market, the USD-Index traded higher for a vast majority of the European session, which weighed on EUR/USD, GBP/USD and commodity-linked currencies. GBP came under further pressure as market participants focus on the BoE's quarterly inflation report due to be released on Wednesday, where the central bank is expected to slash UK's growth and inflation forecasts. Elsewhere, CHF received strength overnight partly on the back of comments from the Swiss economy minister who warned against exerting pressure on the SNB to weaken the currency.
Moving into the North American open, the economic calendar remains thin, however markets will keep a close eye on political developments in the Eurozone. In fixed income, another Fed's Outright Treasury Coupon purchase operation in the maturity range of Feb'36-Aug'41, with a purchase target of USD 2.25-2.75bln, together with BoE's Gilt purchase operation in the maturity range of 2015-2021 are scheduled for later.
• Japanese GDP (Q3 P) Q/Q 1.5% vs. Exp. 1.5% (Prev. -0.5%, Rev. to -0.3%) (RTRS)
The US is ramping up attempts to safeguard its financial system from a worsening of Europe’s debt crisis. US policymakers, alarmed by the political upheaval in Italy and Greece are digging deep into the books of American banks to find out how exposed they might be to Eurozone creditors and the lunging value of sovereign debt. Officials are working on contingency plans for a worst-case scenario should another financial firm crumble. Total US bank exposure to Europe tops USD 4tln. Fed’ s Yellen said a new round of stress tests of US banks will start in a couple of weeks. (RTRS)
In other news, President Barack Obama sought to breathe new life into the free trade agenda by saying the US wanted to sign a next-generation free trade agreement with nine other Asia-Pacific nations by the end of 2012. Aside from the US and Japan, the latter of which only agreed to join talks at the 11th hour, the TPP negotiating partners are Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore and Vietnam. Canada has also expressed an interest in joining. (FT)
Elsewhere, the head of China’s biggest ratings agency, Dagong Global Credit Rating, is warning that it may downgrade the US's sovereign debt rating again because of Washington's failure to tackle the federal budget deficit. (Observer)
EU and UK Headlines
Mario Monti was handed the task on Sunday night of forming an emergency government led by technocrats as Italy’s head of state raced to win broad political consensus before financial markets opened on Monday. Mr Monti, a former European commissioner, and his as yet unnamed cabinet – expected to be dominated by technocrats all chosen from outside parliament – could be sworn in by Wednesday and could then seek a formal vote of confidence in both chambers. (FT)
In other news, Europe’s banks need to keep dumping Italian banks and other assets tainted by the regions debt woes to avoid being sucked into the epicentre of the crisis according to Christian Clausen, president of the European Banking Federation. Also, according to IFR, European banks are planning to dump more of the EUR 300bln they own in Italian government debt, as they seek to pre-empt a worsening of the region's debt crisis and avoid crippling write downs - a move that could scupper the ECB’s efforts to bring down soaring yields. (Sources/IFR)
Elsewhere, UBS expects Eurozone to double dip into recession in the first half of 2012, however it expects the US economy to remain relatively insulated from European economic weakness. (RTRS)
• Eurozone Industrial Production SA (Sep) M/M -2.0% vs. Exp. -2.3% (Prev. 1.2%, Rev. to 1.4%)
• Eurozone Industrial Production WDA (Sep) Y/Y 2.2% vs. Exp. 3.5% (Prev. 5.3%, Rev. to 6.0%) (RTRS)
• Italian BTP auction for EUR 3bln, 4.75% Sep'16, bid/cover 1.469 vs. Prev. 1.34 (yield 6.29% vs. Prev. 5.320%) (RTRS)
European equities traded lower for vast majority of the session as concerns surrounding the Italian government debt dominated market sentiment. Market participants focused on comments from IFR that European banks are planning to dump more of the EUR 300bln they own in Italian government debt, whereas president of the European Banking Federation said that Europe’s banks need to keep dumping Italian banks. This exerted downward pressure on financials and resulted in the Italian FTSE MIB index to underperform its European peers. Elsewhere, strength in the USD-Index weighed upon basic materials and oil & gas sectors. Moving into the North American open, equities continue to trade lower, with utilities and financials being the worst performing sectors.
The USD-Index traded higher for a vast majority of the European session, which weighed on EUR/USD, GBP/USD and commodity-linked currencies. GBP came under further pressure as market participants focus on the BoE's quarterly inflation report due to be released on Wednesday, where the central bank is expected to slash UK's growth and inflation forecasts. Elsewhere, CHF received strength overnight partly on the back of comments from the Swiss economy minister who warned against exerting pressure on the SNB to weaken the currency.
WTI and Brent crude futures traded lower for vast majority of the European session as the USD-Index strengthened amid risk-aversion.
Oil & Gas News:
• The crude market is in balance and OPEC will decide on reducing production levels as Libya raises output at its meeting in December according to the Algerian oil minister. The oil minister also said that USD 100 per barrel price of oil is fair for consumers and producers and he sees a slight increase in global oil demand.
• Kuwait’s oil minister said the market still needs more oil even after Libya resumed output, adding that it is logical for OPEC to increase output. In related news, Libya’s NOC head said Libya is currently producing 600,000 BPD and sees output by around 800,000 BPD by year end.
• Iran does not plan to withdraw from its civil nuclear program, which would jeopardize the country’s independence according to foreign minister Salehi. In a related story, China and Russia share US’s objective of ensuring Iran does not make weapons via its nuclear program and Washington will consult with them on how to achieve that according to US President Obama. Furthermore, Britain’s foreign secretary Hague said Britain does not rule out military action on Iran in the future.