Euro troubles–it’s not just the periphery of Greece and Portugal anymore (again)

So far, global financial markets are willing to overlook deepening debt troubles in Greece and Portugal. After all, these are countries on the “periphery” of the EuroZone and not in the “real” EuroZone. Today’s very gloomy report from the Bank of Italy lowering the projected growth rate for the Italian economy argues, however, that the EuroZone core is in trouble too.

Spanish and Italian bond yields climb but, so far, short of the danger zone

While the yield on the U.S. 10-year Treasury has moved up to 2.49% from 1.93% a month ago, the yield on the Spanish 10-yer government bond has climbed 0.31 percentage points this week to 4.9%. The yield on the Italian 10-year bond has climbed to 4.6%.
That’s indeed a big move higher in a short time but it leaves bond yields for Spain and Italy a long way below the danger zone of 6% and above

Politics in Spain and Italy sink European stock and debt markets

What seems to have really rattled the markets today is political news from both Spain and Italy that threatens to produce weak governments that would not be able to continue the programs that have stabilized the European debt markets. In Spain the threat comes from a corruption scandal that has already led to calls for the resignation of Prime Minister Mariano Rajoy. In Italy it’s the continued surge of Silvio Berlusconi

I think the markets are pricing in a full measure of political incompetence in the U.S. and Europe

Markets seem to have decided that the Italian elections don’t much matter—because Italy is headed into crisis no matter what. And that there’s no way that bumbling U.S. politicians will average a trip off the fiscal cliff. That means negative verbiage in December won’t hurt markets much. But it does leave them vulnerable to unanticipated consequences from that incompetence in 2013

More bad news is good news today and the signs of giddiness on Wall Street

Today not only is bad news good news on the theory that bad economic news will push the world’s central banks to faster action. But also Wall Street is starting to believe its own press releases. Today, we’ve got market analysts saying that stocks should be going higher because earnings are coming in above expectations—even though Wall Street itself created those low expectations.

Today’s rally is built on traders deciding to avoid event risk after Draghi says the ECB will defend the euro

ECB President Draghi’s comments this morning reminded traders that the central bank meeting is just a week away and that the European Central Bank could take action that would put everybody who has made money in recent weeks betting against the euro, and Spanish and Italian bonds, and European stocks in danger of giving back all or most of their gains.