Sentiment Crumbles On Relentless Euro Crisis, French, Italian And Spanish CDS Hit Records

Despite Congress passing the debt ceiling hike, the market's reaction has been swift, brutal and vicious as ever more attention is being paid to Italy and the unforgiving European crisis. As both Spanish and Italian spreads hit new all time records, while CDS are at all time wides for the two countries plus France, the vigilantes are once again preparing to attack and test the ECB's resolve to keep the Euro alive: at this point it is obviously a losing game although expanding the EFSFS to $2 trillion is inevitable (at which point the reaction to German spreads will be swift). In the meantime the scramble for safety is at 2011 highs, with gold on the verge of another record, while the 10 Year US Treasury touching a low of 2.685%, and UK Gilts touching record lows: remember - this is all to make QE3 more palatable when it does begin. Lastly, Bloomberg's TJ Marta summarizes all the market indicators of a day in which sentiment has truly crumbled and in which we expect Italian bank stocks to be halted at least 3 times before market close.

From Bloomberg All News:

  • Italian and Spanish spreads widened to euro-era record levels and 10-yr gilt yields slumped to record low after recent PMIs added to concern the global recovery is faltering.
  • 10-yr gilt yield -3bps to 2.78%; hit 2.77%, lowest since at least 1989 when Bloomberg began collecting the data, on speculation of fresh QE or tax cuts to boost growth
  • European stocks fall to 10-month low, Swiss Franc rose to a record against the dollar; 5-yr CDS for France, Italy and Spain rise to records
  • Although no significant negative headlines overnight, price activity suggests that EU crisis is at imminent risk of worsening
  • Euribor/OIS spread +4.75bps, 2.7 std devs, to 38.6bps, high since Jan.; 1yr euro basis swap -5.6bps, -2.3 std devs, to -39.0bps, 3rd-lowest since Jan.; all other general risk indicators flashing red
  • Eurodollar interest rate future yields higher, sign of US$ funding stress
  • EU peripherals almost all wider, with significant moves for Belgium 2, 10yr, Italy 2yr; record wides for Belgium, Italy, Spain
  • Swiss franc outperforming all major currencies on risk aversion, new record low vs. euro; A$ underperforming after RBA held rates steady with dovish rhetoric
  • Barclays Cuts 3,000 Jobs as Investment Bank Profit Declines

All in all, expect continued selling until 11:30 when Europe closes, and the low volume US-based levitation machine takes over.