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Eurozone crisis live: Italy enjoys ‘decent’ bond auction

Italy’s three-year borrowing costs fall below 5%, but markets unimpressed by bond sale

11.41am: The euro fell to its day’s lows after the Italian bond auction failed to live up to traders’ high expectations, raised after a stellar Spanish bond sale yesterday. The single currency dropped to .2775 briefly before recovering somewhat to .2790.

11.13am: A quick look at the markets reveals that the FTSE is now just over 16 points ahead at 5679, a 0.3% gain, while Germany’s Dax is up 0.4% and France’s CAC has climbed 1%.

Chris Beauchamp, market analyst at IG Index, said:

As the sun rises on the final day of the trading week, the FTSE 100 is up slightly, but the atmosphere remains nervous.

For the second successive day, the morning focus is on a debt auction by one of the eurozone’s more troublesome members. Today, Italy is selling its debt, with the bulls hoping that Rome can emulate Madrid’s success yesterday. The auction saw yields fall, prompting the bulls to snort approvingly, but demand also dropped, which gave bears something to roar about. Ultimately, the market remained somewhat unimpressed, with the FTSE 100 remaining some distance from its early morning highs. Today’s blow-up is engineer Invensys, rudely shoved out of the leading index by Glencore in May last year, down 23% after a profit warning.

Looking ahead to the US open, US futures are slightly down, with the Dow expected to start around 12 points lower. The first reading of the January Michigan confidence index is out later today, while JP Morgan is the first of the major American banks to report its quarterly figures. An optimistic outlook from the bank could breathe new life into the markets, which have yet to push out of the narrow trading range seen so far in 2012.

11.10am: The consensus view seems to be that the Italian bond auction was “decent” but “not spectacular”. It failed to live up to some people’s expectations in the wake of Spain’s roaring success yesterday.

Michael Leister, strategist at DZ Bank in Frankfurt, told Reuters:

Today’s Italian three- to six-year taps attracted decent demand. The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply.

It is tempting to conclude from the Italian bill and bond auctions that PM Monti is rapidly regaining investors’ trust. We remain cautious, however, with regards to such a ‘fundamental’ interpretation. As we explained yesterday, the ECB carry-trade is by far the key driver of the recent outperformance of short-dated periphery bonds.

10.57am: Never mind Spain‘s successful bond auction yesterday – the country is going back into recession. Its economy secretary Fernando Jiménez Latorre warned a few minutes ago that the economy would shrink in the final three months of 2011 and the first quarter of this year:

Our forecast for the fourth quarter GDP is negative, and our forecast for the first quarter… is too.

It also emerged that Spanish banks borrowed close to record amounts from the European Central Bank last month as they took up its unprecedented offer of longer-term funds. Banks borrowed €132bn, compared with €106bn in November and a record high of €140bn in July 2010.

10.43am: Reaction from some analysts to the latest Italian government bond auction is a bit muted, following the euphoria at Spanish and Italian debt sales yesterday when Spain managed to sell sold twice the planned amount, backed by domestic banks awash with European Central Bank liquidity. Belgium also plans to sell up to €500m of longer-dated bonds today.

Peter Chatwell, rate strategist at Crédit Agricole, said:

They sold the maximum amount but prices look weak relative to the secondary market in the November 2014 and bid/cover ratios are lower than the market was expecting. I think in the euphoria of Spain’s auctions yesterday and [ECB president Mario] Draghi’s comments the market got carried away – this should help bring expectations back to earth.

Achilleas Georgolopoulos, rate strategist at Lloyds, neatly summed up the situation:

Taking into account what happened yesterday with the Spain auction, which raised expectations, it was much worse than what the market expected. And if we said for the Spanish auction domestic banks helped it’s probably that Italian banks have less available liquidity to participate.

But on an outright basis it was a decent auction, yields were lower, the bid/covers were OK. The market probably got too carried away as Spain raised double the size they had originally wanted to yesterday and so people were probably expecting the Italian bid/covers to be stronger than this.

10.31am: Italy’s three-year debt costs have fallen below 5%. Today’s long-awaited bond auction did not disappoint: The Italian Treasury has sold the entire €4.75bn of bonds it was looking to dispose of, with the yield at the 3-year auction hitting the lowest level since September.

Italy sold bonds maturing in November 2014 at an average rate of 4.83%, down from 5.62% it paid a fortnight ago. However, the bond sale was covered only 1.22 times compared with a bid-to-cover ratio of 1.36 at the end of Deember.

10.00am: Ben Bernanke presided over his first meeting as Federal Reserve chairman in March 2006 believing the U.S. economy could pull off a “soft landing” from falling home prices, AP reports.

Three months later, Bernanke had begun to grasp that he and others underestimated the risk housing posed to the economy. Newly released transcripts of Fed meetings during Bernanke’s first year as chairman show that, among Fed officials, he often expressed the most concern about housing. But no official, according to the transcripts, recognised the extent of the damage a housing bubble would cause. A year later, the housing market’s collapse helped send the nation into its worst recession since the Great Depression.

In fact, Treasury Secretary Timothy Geithner, then a Fed official, expressed confidence in September 2006 that “collateral damage” from housing could be avoided.

The transcripts for 2006 show that at first Bernanke did not express concern about the cooling of the housing market after a boom that had pushed sales and home prices to record levels. “I agree with most of the commentary that the strong fundamentals support a relatively soft landing in housing,” Bernanke told his follow FOMC members at his first meeting as chairman in March.

However, by the June meeting, Bernanke was expressing more caution saying that the slowdown in housing was “an asset price correction” that bore watching. “Like any other asset-price correction, it’s very hard to forecast, and consequently it’s an important risk and one that should lead us to be cautious in our policy decisions,” Bernanke said.

By the September meeting, Bernanke sounded even more concerned about the impact on the broader economy from the slowdown in housing.
“I don’t have quite as much confidence as some people around the table that there will be no spillover effect,” Bernanke said.

By contrast, Geithner, who was then president of the Fed’s New York regional bank, expressed more confidence that the economy could weather the troubles in housing, saying the issue would be the impact on consumer and business spending. “We just don’t see troubling signs yet of collateral damage and we are not expecting much,” Geithner said at the September FOMC meeting.

The discussion by the members of the FOMC, the Fed board members in Washington and 12 regional bank presidents, gave no indication that any of them foresaw the devastating impact that the collapse of the housing bubble would have. The country fell into a deep recession and severe financial crisis that led to the loss of more than 8 million jobs.

9.50am: Reaction to the producer price figures is trickling in. Philip Shaw, chief economist at Investec, said a sharp decline in consumer price inflation looks to be on the cards.

Samuel Tombs of Capital Economics said:

A sharp drop in both UK input and output price inflation in December had always looked likely, given the sharp rise in prices a year ago. Nonetheless, today’s figures confirm that disinflationary pressure in the economy is building.

Admittedly, output price inflation only affects consumer price inflation after a fairly long lag, so its fall will not do much to help inflation to drop this year. Nonetheless, at the margin, today’s figures should ease the concerns of some MPC members that inflation will not fall to a well-below target rate in 2013 and therefore increase the chances that the Committee will sanction more QE at next month’s meeting.

9.35am: Factory gate inflation in Britain weakened more than expected in December, boosting expectations that the Bank of England will pump more money into the economy next month.

The falling cost of raw materials allowed UK manufacturers to reduce the prices they charge for their goods in December for the first time since June 2010.

According to official figures, producer output prices dropped 0.2% on the month, taking the annual growth rate to 4.8%, the first fall since June 2010 and the lowest rate since December 2010. Oil prices rose at the slowest rate since November 2010 and chemical import costs also eased.

Input prices, a measure of manufacturers’ raw material costs, fell by 0.6% on the month while the annual rate plummeted from 13.6% to 8.7%.

9.01am: The yield, or interest rate, on ten-year Italian government bonds has fallen further below the 7% mark ahead of a bond sale which is expected to attract a lot of demand. Yields dropped 17 basis points to 6.48%, the lowest since 9 December. Two-year bond yields plummeted 40 basis points to 3.98%, the lowest since September.

Gary Jenkins at Swordfish Research says:

Of course for all the waves of optimism that seems to surge across the market on the back of such good news [yesterday's successful Spanish and Italian bond auctions] there is also the realisation that this is just a small step down a very long road for both Italy and Spain. Italy has to raise some €440bn of debt this year and no doubt there will be close attention paid to their longer dated bond auctions which are taking place today.

8.25am: On the corporate front, Swiss pharma giant Novartis is slashing nearly 2,000 jobs in the US. The company is the latest drugmaker to cut its salesforce as the industry faces the biggest wave of patent expiries in its history.

Over here, Tesco is the target of several broker downgrades this morning, by UBS, HSBC, Citigroup and Barclays. The supermarket juggernaut is the biggest faller on the FTSE after reporting its worst Christmas in decades yesterday.

8.21am: Italy will sell €4.75bn of debt across three issues later this morning, including €3bn of 6% bonds maturing in 2014. The yield spread between Italian and German bonds narrowed ahead of the auction, which is expected to mirror yesterday’s success.

We are also getting UK producer price data for December at 9.30am.

8.07am: Stock markets are bouncing back. The FTSE has climbed more than 40 points to 5703, a 0.7% rise, in the first few minutes of trading. Germany’s Dax is 1% higher, France’s CAC and Spain’s Ibex have risen 0.9% while Italy’s FTSE MIB has advanced even more strongly, by 1.3%, ahead of a three-year bond auction.

Banks were the main risers. In London, Royal Bank of Scotland, Barclays and Lloyds Banking Group, along with miners Kazakhmys and Vedanta, led gains on the FTSE.

Brent crude oil is also going up, rising above 2 a barrel due to worries over supply disruption from Nigeria and receding fears over the eurozone debt crisis. Brent crude is now trading at 2.15 after rising more than to 2.50 a barrel.

7.53am: The euro is up against the dollar this morning, amid stop-loss buying and hopes for a Greek bond swap deal. It hit .2879 earlier and is now trading at .2854.

The chief executive of French bank Société Générale, Frédéric Oudéa, told newspaper Les Echos that there is a good chance that a deal with private creditors to write down at least half the value of their Greek bonds will happen within the next few days.

Etes-vous optimiste sur l’issue des négociations sur l’échange de dette grecque ?

Elles ont de bonnes chances d’aboutir dans les prochains jours. Parmi les créanciers privés, les banques ont accepté de faire un effort exceptionnel. Il est possible que les pertes finales aillent au-delà de 50 %, mais il faut veiller à respecter un certain équilibre car même si les gouvernements s’attachent à dire que la Grèce sera un cas unique, il fera école pour les investisseurs. Il deviendra un « étalon du pire » qui risque de peser sur les autres pays.

7.42am: Good morning. We’re back with more live coverage of the European debt crisis and world economy.

The euro has rallied in the past 24 hours, thanks in large part to the successful Spanish and Italian bond auctions yesterday. Bond yields fell sharply as Spain sold €10bn, twice its target on the short dated debt, while Italy got its bonds away at half the interest rate it was paying last year. There is another Italian bond sale today, €3bn of three-year debt.

European stock markets are poised to open higher, with the FTSE 100 index in London seen rising more than 30 points to 5696.

Michael Hewson, market analyst at CMC Markets, said:

It has been speculated that the new 3-year LTROs [Long Term Refinancing Operations] initiated by the ECB last month have played a large part in the success of bringing yields down as banks take advantage of the low borrowing costs to play the carry on sovereign bond yields.

It remains to be seen whether banks and investors will be prepared to do that with longer term paper and that really remains the acid test, as to whether these lower borrowing costs are sustainable.

There is also speculation that the relaxation of capital rules, to be finalised next week could see the unlocking of trillions of extra euros with which banks can use for collateral to gain access to these ECB loans.

Today’s Italian bond auction of €3bn of three year debt, maturing in November 2014 is likely to go the same way as yesterday’s successful T-bill auctions, with lower yields, and certainly below the yields seen in December at around 5.62%, for similar terms.

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