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More weakness for EU stocks as Italian bond auction eyed

Article By: ,  Financial Analyst
November 10, 2011 10:54 AM

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.

Deep concerns remain over Italian debt, with yields remaining well above the crucial 7% level for 1-year bonds this morning despite attempts to speed up a vote on Italy’s EU agreed debt reduction measures in the Italian senate and paves the way for PM Berlusconi’s resignation and a new government to be formed. A vote could now come as early as tomorrow on the measures but of course there will still be question marks over Italy’s ability to enforce the agreed measures.

All eyes will however be on a test of market confidence in Italy with a short term bond auction set to take place this morning at around 10am (UK time), whereby Italy will attempt to auction off around $5 billion worth of short-term 3-month and 12-month Treasury bills. What will be interesting to see is how much demand there is for these bills and the yield level paid, i.e. the cost of borrowing for Italy. It is expected that there will be a large increase in yields paid considering the moves in Italian bond yields over the last 48 hours.

Whilst markets sold off on Thursday, there are muted hopes that Italy will now speed up its political regeneration after the sharp moves seen in its bond markets. There is fresh speculation that once the debt reduction measures have been passed, Mr Berlusconi could either resign and be replaced by former European commissioner Mario Monti, who would lead a unity government, or call early elections. Italian banks have gained somewhat on speculation today but considering the high volatility and fragility of the situation in Rome, investor trading activity remains extremely short term today.

More to follow after the Italian bond auction at 10am (UK time).

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