Italian bond auction in focus as Bersani tries to form a government
By Michael Hewson (Senior Market Analyst at CMC Markets UK)
When the Italian Treasury scheduled today?s 10 year bond auction they were probably hoping that Mr Bersani would have been safely elected as Italian Prime Minister and 10 year bond yields would be trading nearer 4% than 5% in a much more benign environment.
At the last auction yields were at 4.17% with a bid to cover of 1.3. It is a safe bet that yields will be higher today.
Sadly that belief of a more benign environment has proved to be somewhat misplaced after this week?s election outcome in Italy, and after a few weeks and months when the European sovereign debt crisis appeared to be having a nap; it now appears to be back with a bite.
In the process it has also given a serious wake-up call to complacent European politicians like Olli Rehn, to name one of many, who were, only a few weeks ago, declaring the crisis over and ridiculing the Cassandras.
The first attempts to form some semblance of a government now look set to begin with Pier Luigi Bersani making the early running in an attempt to contain the damage and mitigate the nervousness of investors in the wake of the bloody nose given to Italian and European policymakers by the Italian public.
Once person a little relived that markets are focussing on Italy again is likely to be UK Chancellor George Osborne after the weekend downgrade of the UK by Moody?s. This new market turmoil has seen UK borrowing costs drop sharply to their lowest levels this year as investors move capital back into UK gilts.
This is probably about as good as it gets though as the troubles of the UK economy are likely to be laid bare once again by the second iteration of Q4 GDP numbers this morning, which are expected to remain unchanged at -0.3%. This second iteration is expected to show a exports revised from 1.2% to -0.8% and is likely one of the reasons behind yesterday?s surprise announcement by deputy governor of the Bank of England, Paul Tucker that the prospect of a ?negative interest rate? policy was being considered.
In the US we?ve seen continued evidence of a recovery in economic data, after a surprisingly better than expected rebound in consumer confidence for February yesterday, while Fed Chairman Bernanke will once again spend another day testifying on Capitol Hill.
Today?s economic data is expected to see durable goods orders for January decline 4% after the 4.3% rise seen in December. This decline is likely to be as result of a drop in aircraft orders for Boeing.
EURUSD ? the euro has found a degree of support just above the low this year at 1.3000; however the bounce so far has been restricted to 1.3125 and the 100 day MA. The H&S objective at 1.2900 remains intact while below the neckline at 1.3325. Longer term support lies at 1.2825 and the 200 day MA.
GBPUSD ? while above the lows at 1.5070 the risk of a rebound remains but we need to break through the 1.5270 area to stabilise for a broader rebound towards 1.5400.
A break of 1.5070 argues for a longer term move towards 1.4950, which is the July 2010 low.
EURGBP ? the euro continues to find support at the 0.8580 area and the 15th February low. Only a move below 0.8580 has the potential for further weakness towards 0.8460. Having seen a key reversal day on Monday the risk is for a move lower while below 0.8680.
USDJPY ?the risk remains for a test towards the 90.30 area while below the 92.40 area which is currently acting as resistance.
The bullish scenario remains intact while above the 90.30 area with a break through 92.50 targeting a return towards 93.20 as well as the 94.00 level once again.
Equity market calls
FTSE100 is expected to open 5 points higher at 6,275
DAX is expected to open 28 points higher at 7,625
CAC40 is expected to open 10 points higher at 3,632
FTSEMIB is expected to open 36 points higher at 15,588