You’re excused if you don’t know exactly what European leaders decided at the end of today’s summit—they can’t seem to agree either—or what the actual effect might be—the financial markets are positive but confused.
A German government source briefing reporters ahead of the European summit today warned against “exaggerated panic mongering” over the surge in yields on Spanish and Italian government debt. That on a day that saw Italy sell 10-year bonds at 6.19%, up from a 6.03% yield at the last auction
The euro debt crisis calendar according to Italy provides yet more evidence that the summit of European leaders that begins tomorrow is make or break for the euro. By this calendar the technocratic government of Mario Monti has only a month to head off early elections that could sweep anti-euro politicians into power in Rome
Well, at least, European leaders, as they prepare for their end of the month summit, are under no illusion that the proposed bailout for Spain’s banks was enough to hold the crisis at bay. In today’s brutal Italian bond auction yields for one-year government debt hit 3.972%. That’s a six-month high and well above the 2.34% yield at the auction for one-year paper on May 11
Perfect illustration of my “less bad” currency scenario today. The euro is up 0.33% against the dollar—despite disappointing news from Italian and Spanish bond auctions today—because the U.S. dollar is down—on a “feeling” that the Federal Reserve may say something tomorrow at the end of its two-day meeting that would increase the odds of a new program of quantitative easing.
If bad economic and bond market news raises the odds that the Federal Reserve and other central banks will launch another round of monetary stimulus, then “bad” news is really “good” news, right? That’s the logic today when despite bad news on U.S. unemployment and Italian bond yields, global stock markets have moved back into rally mode.
Italy sold 11 billion euros ($14.4 billion) of three-month and one-year debt. The amount sold at auction met government targets but the yield soared to 2.84% from 1.405% at the last auction of similar maturities on March 13. Italy is due to auction 5 billion euros of bonds tomorrow. But yields on 10-year Spanish and Italian bonds fell on speculation that the ECB would resume buying bonds
The worst damage actually didn’t take place in EuroZone stock markets today. That distinction goes to the Spanish and Italian bond markets. The yield on the Spanish 10-year bond climbed 0.2 percentage points today to 5.985%. That puts the bond knocking at the 6% level that earned the title “crisis” back in December. The yield on the Italian 10-year bond rose to 5.691%.
When an Italian bank can tap the financial markets, you know that European Central Bank President Mario Draghi’s plan to offer European bans hundreds of billions in three-year loans has gone a long way to restoring confidence in the European banking system.
Demand at this morning’s auction of longer-term Italian government debt fell a bit sort of target but yields fell—all in all a decent result although certainly not good enough to remove all worries that Italy will have to pay more to sell 100 billon euros of debt in the first quarter of 2012.
As far as the financial markets are concerned today, however, the good news from the Italian debt auction has been completely overshadowed by the shock that European banks have put almost all of the 489 billion euros they borrowed from the European Central Bank last week on deposit with the central bank.
