ETX Capital Daily Market Bite, 27th February, 2013: Markets Steady But Fragile On Italy Woes
February 27, 2013 11:06 am
February 27th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist
Fed Chairman Ben Bernanke defending his monetary stimulus measures by talking up QE helped sentiment recover a tad overnight, providing Asian markets support. In Europe, traders are also taking heart in Bernanke’s accommodative remarks but moves to the upside are likely to be limited given the unease at the outcome of the inconclusive Italian elections.
The worst case scenario with a hung parliament in Italy pushed investors to rush to the exits, favouring core government bonds and the safety of gold. Equities sold off rapidly in Europe, particularly the Italian markets and peripheral banks — Italian and Spanish bond yields reached for the ceiling with the 10-year in Italy at its highest level since December 2011.
Traders are now pricing in the risk of an ungovernable Italy for the coming months, unconvinced that any outcome following this election would be truly market-friendly. Euro sceptics gaining such traction with right wing leaders Berlusconi and Grillo winning such strong support shocked investors yesterday. Left winger Bersani’s influence slipped while former technocrat PM Monti may hang up his gloves after Italian voters showed their dissatisfaction with his policies.
The situation is still very much fluid but it appears that politicians are now considering their options, one of which could possibly lead to a broader coalition with all parties included but this is highly improbably and would still not alleviate fears about the political instability there. What is more likely is that there will be a caretaker government in charge until new elections which could be some time away, bringing about a prolonged bout of uncertainty which will dent confidence around Italy and the euro zone.
Indeed, Moody’s overnight said the political gridlock in the country puts Italy’s credit rating at risk, raising the prospects of a downgrade. The country’s bond yields will remain under significant pressure so long as the political gridlock remains unresolved — today’s Italian bond auction in that case will act as a test to see what sort of demand the country’s paper can still garner. Judging by yesterday’s T-bills auction, demand is likely to be softer due to the recent political developments there but what is more concerning is the rise in bond yields will be Italy will have to pay an expensive price to sell debt.
Contagion fears in that case will grip the markets with Spain’s bond yields and national market to suffer on the back of Italy’s woes. Spanish yields rose sharply yesterday but are still at a level deemed sustainable for the market. That however could change very quickly as the renewed bout of euro zone uncertainty could push the 10-year above 6% which could be enough to prompt Spanish PM Rajoy to get on the ringer to ECB head Draghi and consider tapping into his OMT programme.
Draghi is due to speak in Munich with traders hoping he can share his views on Italy’s election outcome. Italy’s bond auction will be the main highlight in the session but attention will also be on the second release of the UK’s 4Q GDP data and euro zone consumer confidence surveys later in the day. In the US, we have more housing data and durable goods orders — Bernanke will be back on Capitol Hill for his second day in front of US lawmakers.
February 27th, 2013, Daily Market Bite from Ishaq Siddiqi Market Strategist
Fed Chairman Ben Bernanke defending his monetary stimulus measures by talking up QE helped sentiment recover a tad overnight, providing Asian markets support. In Europe, traders are also taking heart in Bernanke’s accommodative remarks but moves to the upside are likely to be limited given the unease at the outcome of the inconclusive Italian elections.
The worst case scenario with a hung parliament in Italy pushed investors to rush to the exits, favouring core government bonds and the safety of gold. Equities sold off rapidly in Europe, particularly the Italian markets and peripheral banks — Italian and Spanish bond yields reached for the ceiling with the 10-year in Italy at its highest level since December 2011.
Traders are now pricing in the risk of an ungovernable Italy for the coming months, unconvinced that any outcome following this election would be truly market-friendly. Euro sceptics gaining such traction with right wing leaders Berlusconi and Grillo winning such strong support shocked investors yesterday. Left winger Bersani’s influence slipped while former technocrat PM Monti may hang up his gloves after Italian voters showed their dissatisfaction with his policies.
The situation is still very much fluid but it appears that politicians are now considering their options, one of which could possibly lead to a broader coalition with all parties included but this is highly improbably and would still not alleviate fears about the political instability there. What is more likely is that there will be a caretaker government in charge until new elections which could be some time away, bringing about a prolonged bout of uncertainty which will dent confidence around Italy and the euro zone.
Indeed, Moody’s overnight said the political gridlock in the country puts Italy’s credit rating at risk, raising the prospects of a downgrade. The country’s bond yields will remain under significant pressure so long as the political gridlock remains unresolved — today’s Italian bond auction in that case will act as a test to see what sort of demand the country’s paper can still garner. Judging by yesterday’s T-bills auction, demand is likely to be softer due to the recent political developments there but what is more concerning is the rise in bond yields will be Italy will have to pay an expensive price to sell debt.
Contagion fears in that case will grip the markets with Spain’s bond yields and national market to suffer on the back of Italy’s woes. Spanish yields rose sharply yesterday but are still at a level deemed sustainable for the market. That however could change very quickly as the renewed bout of euro zone uncertainty could push the 10-year above 6% which could be enough to prompt Spanish PM Rajoy to get on the ringer to ECB head Draghi and consider tapping into his OMT programme.
Draghi is due to speak in Munich with traders hoping he can share his views on Italy’s election outcome. Italy’s bond auction will be the main highlight in the session but attention will also be on the second release of the UK’s 4Q GDP data and euro zone consumer confidence surveys later in the day. In the US, we have more housing data and durable goods orders — Bernanke will be back on Capitol Hill for his second day in front of US lawmakers.
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