Tuesday, July 12, 2011

Today's Major Market Move - Italian Stock Market Down Over 8% for the Week

We're going to stick with European equity markets for out Major Market Move post, specifically European countries that border the Mediterranean. Because of heightened sovereign debt concerns, Italy's stock market, as well as the stock markets for a good portion of the world, have taken a hit over the last 5 trading days. All of the Italian equity indexes we track are down well over 8%.

There was a pretty decent bounce back in equity markets in the latter part of the European trading day after the successful completion of an Italian bond auction. There were some concerns that the auction might fail. From the Wall Street Journal:
European stocks came off lows Tuesday as the Italian market pared losses following a broadly successful, albeit expensive, Italian bond auction.

Yields at Italy's auction of 12-month Treasury-bills came in at 3.67%, against expectations of 3.1%. Still, UniCredit's Luca Cazzulani said that considering the tense market environment and despite the higher auction yields, the auction result "is good and shows the recent tensions have not weighed negatively on demand for Italian paper."

In fact the auction turned out so much better than expected that rumors began circulating that the ECB was involved. From reuters:
They later slipped back below 6 percent on market talk the ECB was buying Italian and Spanish bonds even though bond traders who normally see such transactions said there was no sign of purchases.

I have a hard time believing that there wasn't some form of intervention. In fact what would really surprise me is if intervention had ONLY been limited to the Italian bond auction. Everyone with two firing neurons knows the game by now. The powers that be will throw everything they have at their disposal, and then some, to kick the can just a little bit further down the road. There are only 2 things that will give them pause.


Or This:

Coincidentally (or maybe not so much), after the equity markets received their boost from the auction results, the commodity markets also started to surge higher. The soft commodities such as rice, wheat, corn, sugar, cattle all had particularly robust gains of over 5%. Gold is nearing its all time nominal high in US dollars and WTI Crude is back to threatening 100$/barrel.

As a nice little twist, the Fed meeting minutes were released today which indicated that some FRB members support additional easing. It will most likely be in the form of more QE but that term is now tainted so don't be surprised if they tweak the program and give it a different name. The releasing of the minutes coinciding with the European turmoil today reeks of coordination but bear in mind that the Fed meeting took place weeks ago and the timing of the release is planned well in advance.

(Click on the images for a larger view.
Click here for the current performance of global equity indexes.
Click here for the current chart of WTI crude futures.
Click here for the current performance of commodity futures.)

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