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

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.