Easy come easy go so far. Positive weekend Euro developments certainly tried to give the EUR a lift, old resistance levels were nearly tested in the Asian session, but alas, gains were not sustainable into the Ã¢â‚¬Å“importantÃ¢â‚¬Â Italian 5-year auction. Naturally, the market has been focusing on whether the ECB would start buying Italian bonds following the progress on Italian politics. If they were to buy in size, risk position holding would have got the thumbs up. Failure to appear and the markets would be back playing that negative tune.
ItalyÃ¢â‚¬â„¢s Tesoro tapped Euro 3b 9/16Ã¢â‚¬â„¢s in what ended up being a Ã¢â‚¬Å“so-soÃ¢â‚¬Â result. The resulting cover of 1.47 was below the 1.5 average. Bigger picture, it was a small auction, with too much market emphasis being put on it. It was taken down in a slightly upbeat market coming on the back of BerlusconiÃ¢â‚¬â„¢s departure and MontiÃ¢â‚¬â„¢s new tenure. Technically, further improvements from here would have been tough at least without ramped up buying coming from the EFSF or the ECB and we know that is not happening. Hence the spike in yields!
Market sentiment remains fragile and even the slightest sign that Italy does not intend to do it utmost, capital markets will punish them. So far, the reaction of various Italian parties highlights that support for Monti is tenuous and that Ã¢â‚¬Å“reforms can easily be derailedÃ¢â‚¬Â. European Banks are under intense regulatory pressure and do not have the stomach to digest more Ã¢â‚¬Å“peripheryÃ¢â‚¬Â debt, if anything, they want to reduce their excess risk. Currently, the market is back to unwinding the event risk weekend premium that was put on during North Americas partial off-day last Friday.
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