Yesterday 11/08/2011 in Italy, Prime Minister Berlusconi's offer to resign boosted optimism Italy would appoint a new leader who can tame the debt crisis. Europe and U.S. stock markets rallied and interest rates increased on the idea that progress was being made. That all lasted about 20 hours; this morning Europe's equity markets are lower and in the U.S. the DJIA (Dow Jones Industrial Average) opened down 200 points, the 10-Year Note at 9.30, +32/32 at 1.97%, -11 bps and mortgage prices +11/32 (.34 bps).
French banks taking huge hits this morning on deposit factor for Italian bonds due in 7-to-10 years will be raised to 11.65%, the French unit of LCH Clearnet said. That compares with a charge of 6.65% announced last month. Clearing houses guarantee that investors' trades are completed by standing in the middle of two counterparties and raise margin requirements to protect themselves against losses should one side of the trade fail. French banks face collateral damage from the political turmoil that sent Italy's bond yields to euro-ear records. Austerity measures to balance Italy's budget are also threatening growth in an economy that has lagged behind the European average for more that a decade and may hurt the French banks' consumer businesses.
Italy's $2.6 trillion of debt is the world's forth largest, behind the U.S., Japan and Germany and more that that of Greece, Spain, Portugal and Ireland combined. Relative to gross domestic product, it is the highest in Europe after Greece, standing at about 120%.
Events in Europe continue to drive U.S. markets, everyday analysts try to assess each event that occurs. Yesterday markets were motivated by Berlusconi's offer to resign after he failed to get necessary votes of confidence; U.S. stocks rallied, U.S. interest rates increased. This morning the U.S. 10-Year Note yield is trading once again just below 2.00% and U.S. stock indexes are being hit hard in early trading. Yesterday markets believed the Italian crisis was on the path of being dealt with, today with margins increasing and Italy's 10-Year Note at the highest ever since the EU was formed in 1999 another round of panic. Focus now will likely be on the ECB, whether it will step up and buy Italy's debt and take the pressure off...for the moment.
Investors moving out of equities ths morning and into treasuries on worsening outlook in Italy and the inability of all of Europe's various entities cannot agree on what to do. Over 2 years and the problems continue to worsen. G-20 leaders last week balked on having the IMF taking a larger roll; politicians running for cover and everyone looking out for number one. Europe is going to fall back into recession, as it does U.S. equities will be drawn down; safely into treasuries is the likely outcome with possibly much lower rates. Talk is cheap as it is said, the 10-Year Note, pacesetter for mortgage rates, while under 2.00% this morning has yet to sustain a close below 2.00% since late September when Operation Twist was announced and then it didn't hold long. Since then though the debt crisis in Europe has increased; improving the view that U.S. rates could decline.
In the "it doesn't matter" column this morning September wholesale inventories expected up 0.6%, were down 0.1% with inventory/sales ratio unchanged from August at 1. 15 months
At 0100pm this afternoon the Treasury will auction $24 billion of 10-Year Notes; yesterday the 3-Year Note auction went well. Today with rates lower the demand for the 10-Year Note will be interesting' a solid auction would add to the increasing bullishness.
The day is just getting underway; all focus will be on what if anything comes from the ECB and what the central bank will do to curb the explosion in Italian interest rates. Greece is still not making any quick headway in forming a new government but the attention is all on Italy at the moment.