EU Indices mixed after ECB intervention and Italian bond auction

European stock markets opened to more weakness on Thursday tracking a sharp sell off in US stocks overnight after markets in London, Paris and Frankfurt had shut.

The FTSE 100 opened to weakness of just under 1%, weighed down by heavyweight miners and banking stocks, whilst the DAX and CAC both saw early losses of 0.4% to add to yesterday’s sharp falls too.

However, a mini rally was then staged as investors looked to bargain hunt in the short term and this pushed the DAX and CAC into positive territory, whilst FTSE losses receded to trade down by 0.5% on the day.

Deep concerns remain over Italian debt of course, but given the exacerbating moves seen with yields and stocks over the last 48 hours, there has been a degree of calmness in today’s early trading, which is positive.

Italian 10-year bond yields have retraced a significant amount of yesterdays rise to trade back near the 7% level, whilst the short term Treasury Bill auction this morning could have been a lot worse. Italy sold €5bn worth of 12 month bills at a bid-to-cover ratio of 1.989 and a gross yield of 6.087%, which marks a stark increase from October’s auction yield of 3.570%. Given the shockwaves in the bond markets over the last few days, it had been feared the result would have been worse than this with grey market yields indicating as high as 7.7% and so the market read todays auction in a positive light.

Talk that Italian banks had however been nudged by the Italian authorities to pick up bonds in today’s auction means that today’s auction should do little in the long run to ease fears about Italy’s inability to contain the crisis from escalating further.

Major intervention in Italian bond markets by the ECB has also helped to ease bond and stock market tremors though again, one questions the longevity of this tactic without the Central Bank starting the printing presses. ECB intervention buys Italy time but with that time running fast out, the market is increasingly looking to the Central Bank to publicly step up to the plate in providing fiscal support to Italy, though comments from ECB’s Praet today that not much more can be expected from the ECB appears to pour some scorn on that aspiration.

Talk of an emergency meeting of the ECB to take place today and the potential for the Central Bank to announce unlimited buying of Italian bonds once a new government is in place will however keep investors on tenterhooks.

The euro crisis has taken a bit of a breather today given the ECB intervention but the outlook for the situation remains far from certain and this could keep the market choppy going forward.

Eyes now switch to the Bank of England who announces their latest MPC decision at noon London time. The markets are not expecting any change on rates or asset purchases but given the suprise last time around, when the BoE announced QE2, traders will be on high alert for another shock.