Overseas/Overnight Wrap

I HOPE you did get a chance to read last night's post in its entirety. If you did, then what has happened overnight should be of no surprise, it should have been expected. These are the macro fundamentals that will continue to move this market lower and having a basic understanding of them is essential in sorting out what is important and what is noise. I'm just surprised how quickly even overnight events unfolded.

First Moody's Credit Rating Agency states the very obvious and in an around the bush kind of way, points to what all investors in Europe are starting to look to.

"Moody’s released a damning report today saying that the pricing of the auction and the lack of progress in leveraging its lending capacity showed the “limits of the EFSF’s ability to support European government bond markets.” 


Last week's bond issuance priced at 177 basis points (bps) over 10-year German bunds, higher than the 51bp spread seen in a similar auction in June - "The rise in EFSF spreads is an important signal because it reflects a rise relative to the spreads of its Aaa-rated guarantors," Moody's said. 


“With its current lending capacity (which is at about €266 billion considering commitments to Ireland, Portugal and Greece), the EFSF cannot meaningfully support the euro area’s large government bond markets. This limits the EFSF’s role as an important pillar of the euro area crisis management strategy.” 


As for the around the bush hint, think ECB.




Furthermore, the interview I quoted last night from Jens Weidmann seems to have been a timely topic and dovetails perfectly with the last story, given he spoke in Europe this morning at the EuroFinance Conference and had this to say

*ECB'S WEIDMANN SAYS ITALY HAS `WORRYINGLY' HIGH DEBT BURDEN

*WEIDMANN: ECB MUST NOT SOLVE SOLVENCY ISSUES OF STATES, BANKS

*WEIDMANN SAYS MARKET FORCES HAVE `IMPORTANT DISCIPLINARY' ROLE

*WEIDMANN SAYS USE OF MONETARY POLICY FOR FISCAL NEEDS MUST STOP

Instantly putting a wet blanket on the hope the ECB would do what the EFSF can't.

I noted last night that the market faced a test today in an Italian bond auction of 3bn Euros of 5 year bonds, the last auction saw a yield of 5.32%, this auction went as high as 6.29% before the ECB intervened.  It seems the ECB played the same game as last week (as they are not allowed to buy in the primary auction-thus they use banks to do the dirty work for them) as the rate in the secondary market was higher before the auction at 6.43%. Again, same question as last week, why would any bond buyer take less risk compensation in a primary offering then they can get in the secondary market?

In any case, the ECB intervention didn't last long before Italian 10 year BTPs started falling off a cliff and heading back toward their worst levels.

Also timely in last night' post was the country everyone seems to have forgotten about, Spain.

Spanish 10 year yields took off this morning and hit levels above 6% remember, that is the red zone. 

 There's the spike this morning (I wish  had a Bloomberg Terminal!)

 And here it is moving close to record highs, soon Spain will be the new Italy as far as headlines go.

The banking sector in ITaly, which seems to think they have too much exposure to Italian bonds to sell them like all of the other banks across the world are doing, just saw UniCredit's 3Q release, they had a 10.6 Billion Euro loss on the quarter as compared to their annual estimate of a 7.4 billion euro profit!

They are now going to try to raise 7.5 billion euros! Good luck.

And the day has just started!