- Italian Bonds Suffer Worst Day in More Than 25 Years
A deepening political crisis in Italy, the euro zone’s third biggest economy, fuelled a selloff in Italian assets and the euro on Tuesday that was reminiscent of the euro zone debt crisis of 2010-2012.
Short-term Italian bond yields were set for their biggest one-day jump since 1992 IT2YT=RR, while Italian and wider euro zone banking stocks headed for their worst day since August 2016 .FTIT8300. At an auction of six-month debt, the government had to pay investors the highest yield in more than five years.
The moves come after Italy’s president appointed a former International Monetary Fund official as interim prime minister, with the task of planning for snap polls and passing a budget.
Investors believe the election will deliver an even stronger mandate for anti-establishment, eurosceptic politicians, casting doubt on the Italy’s future in the euro zone.
“The spectacular rise of 2-year yields in Italy this morning reflects break-up or redenomination fears,” Martin van Vliet, ING Bank’s senior fixed income strategist, said.
Italy’s central bank chief warned on Tuesday that the state was only “a few short steps” from losing investors’ trust.
Ratings agency Moody’s warned that Italy was likely to face a downgrade if a new government pursues fiscal policies that do not put debt levels on a sustainable downward path.
While the 5-Star Movement and far-right League have dropped plans to take power, they have now switched to campaign mode. 5-Star has called for protests against President Sergio Mattarella’s rejection of the parties’ nominee for economy minister, Paolo Savona, who has argued for Italy to quit the euro.
So far, the European Central Bank’s bond buying programme has provided a powerful backstop to euro zone government debt, but latest market moves suggest this buffer may have lost its punch.
The closely-watched Italian-German 10-year bond yield spread, seen by many investors as an indicator of sentiment towards the euro zone, was at its widest since June 2013. IT10YT=RR DE10YT=RR.
The spread rose above 300 basis points, having almost tripled from end-April levels around 115 bps. In 2011, at the height of the euro debt crisis, that gap was at 560 bps.
“With such an unclear Italian political situation, investors will continue to demand a significant uncertainty premium,” said Isabelle Vic-Philippe, head of euro government bonds at Amundi, one of Europe’s largest investors.
Italy’s 2-year yield spiked more than 150 bps to 2.73 percent, while 10-year bond yields jumped 50 bps to their highest level in over four years at 3.38 percent IT10YT=RR. Italian bond yields traded above U.S. Treasury yields US10YT=RR for the first time in almost a year.
The Italian 2-10 year bond yield spread was at 42 bps — its tightest since 2011 — having been at 220 bps a week ago.
The cost of insuring exposure to Italian risk in the five-year credit default swaps market rose to a 4-1/2 year high of 225 basis points, a jump of 49 basis points on the day, data from IHS Markit showed.
“Taking any position in Italian debt, long or short is dangerous right now,” said David Roberts, head of global fixed income, Liontrust Asset Management.
A rush to safe havens briefly pushed Germany’s 10-year bond yield to 0.19 percent DE10YT=RR, its lowest in more than a year.
The rise in borrowing costs and potential knock-on effects on the euro bloc saw money markets further trim bets that the ECB will raise interest rates in June 2019. They now bet on a 30 percent chance of a 10 bps rate rise that month, half of what was priced last week.
Oil Prices Hold Steady Ahead of Crucial OPEC+ Meeting Amidst Fed Rate Hike Signals
Oil prices maintained their significant gains as traders anticipate the outcome of a crucial OPEC+ meeting on supply while considering signals from the Federal Reserve regarding interest rate policies.
Global benchmark Brent hovered below $82 a barrel, having surged over 2% on Tuesday, while West Texas Intermediate traded under $77.
The OPEC+ meeting, scheduled for Thursday to set policies for 2024, is currently grappling with a dispute over output quotas for some African members.
The recent rise in crude prices is underpinned by a weakening dollar, with a Bloomberg gauge of the US currency reaching its lowest level since August.
Federal Reserve policymakers, including Governor Christopher Waller, have hinted at an impending pause in the series of rate hikes, contributing to the bullish sentiment in oil markets.
A softer dollar enhances the appeal of commodities for international buyers.
Yeap Jun Rong, a market strategist for IG Asia Pte in Singapore, commented on the interplay of factors, stating, “The US dollar was dragged lower on a build-up in dovish expectations, which was very much cheered on by oil prices.”
However, concerns persist about OPEC+’s ability to address the challenges in the oil market effectively.
Despite the recent gains, oil is on track for a consecutive monthly decline due to increased supply from non-OPEC countries, intensifying pressure on the cartel and its allies to consider more significant output cuts.
The International Energy Agency’s earlier assessment indicated a potential return to a global crude surplus in the coming year.
In the US, the American Petroleum Institute reported a 817,000-barrel decline in nationwide inventories last week, potentially marking the first drop in six weeks, pending confirmation from government data.
This development may add support to oil prices and impact the ongoing dynamics in the energy market.
Oil Prices Stabilize as OPEC+ Weighs Deeper Output Cuts Amid Global Supply Concerns
Market Evaluates OPEC+ Decision Amidst Bearish Sentiment and Global Supply Worries
A Relaxed Start to the Week But Much More to Come, OPEC+ Eyed
By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
It’s been quite a calm start to the week which isn’t entirely surprising given the lack of events on the calendar today. That said, things are expected to pick up with the rest of the week serving up some big economic releases and a hugely important OPEC+ meeting.
All data now, particularly that of the US, is being looked at through the prism of what it will mean for the final central bank meeting of the year and the new projections it’ll be accompanied by.
Since the last meeting, the data has been encouraging and we’ll get another batch before the Fed meets on 13 December. This week we’ll get the October PCE inflation data – the Fed’s preferred measure – as well as third quarter GDP, ISM manufacturing and jobless claims.
Outside of the US, we’ll get flash HICP inflation data for the eurozone, PMIs from China, CPI figures for Australia and a rate decision from the RBNZ. On top of all that, there’s a plethora of central bank speakers making appearances which will keep us on our toes.
BoE Governor Bailey got the week off to a start on that front, pushing back against expectations for rate cuts from Q2, claiming he doesn’t expect any for the “foreseeable future”. A vague commitment as ever but all we can expect from policymakers for now. There’s still a way to go and as Bailey highlighted, getting from peak to now is likely to be much easier than from here to 2%.
Oil choppy ahead of Thursday’s OPEC+ meeting
Arguably, the OPEC+ meeting will be the week’s most impactful event. Not just because any decision could have direct consequences for price and therefore inflation but also due to the meeting already being pushed back by four days, so there’s clearly some disagreement within the alliance.
The group has always found a way to get an agreement over the line before, even if that means the biggest producers taking on more of the additional commitments so it’s probably safe to say something similar will be achieved this week. But the question is how far they’ll push it, given the recent trend in oil prices and increasing concerns around global growth next year.
Gold eyeing record highs?
Gold has got the week off to a strong start, up around half a percent and hitting a six-month high. It just about managed to end last week above the psychologically challenging $2,000 level – where it’s repeatedly been pushed back from over the last month – and it seems that has propelled it on today.
We’re still seeing some push back though but this break has been backed by softer US data in recent weeks and less hawkish commentary from the Fed. That may be the difference this time around and enable it to look up towards record highs, only a few percent above where it currently finds itself.
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