Here we go again. Just like we wrote about last night, the Eurozone continues to be a focus, with the Bond yields being the headline driver. At last check this morning, Italy 10 Year Bond Yield crossed 7% once again. Yields in other Euro zone countries are also on the rise to include the 2nd largest economy in the Euro zone… France.
It’s only a matter of time before the situation will require some severe intervention. Well actually, that time is now!
The market, at times, can be the worlds best predictor of the future. Most times, the market has reacted ahead of events that would have normally caused a sell-off, because the outcome was “Priced-In”.
One of the less proven theories with the market, is the one of the self-fulfilling prophecy. Where rumor and speculation that may be 100% off base, actually cause the outcome to occur.
For example, a blog can say Morgan Stanley is going bankrupt because of it’s exposure to European debt. Traders then tank the stock to all-time lows on that fear, people withdraw funds from their accounts because of fear …ect. Ultimately the company may have to resort to the outcome that was predicted, not because the blog was right, but because of what the rumor and speculation caused.
This maybe the case with the European Debt crisis. Over the past week, we have seen bond yield rise in Italy to obscene levels. Monday we saw the Yields rise in other European countries such as Spain and France. Is this a self-fulfilling prophecy?
As these yields rise, European countries will find it much more expensive to pay off their debt. We are starting to see a trend that may be unsustainable, and result in at least a few of these European countries going default.
I guess only time will tell!!
European bonds, and I've been saying this since the minute they did the 50% "voluntary" haircut on Greece bonds, is that CDS is no longer relevant. There is no insurance on European bonds. anyone holding Italian bonds can expect the same fate as greece bondholders who had CDS insurance, you are going to get the shaft!!! they had big kool-aid smiles on their face when they announced the Greek bailout, when they really had chit on their face. damned if they did, damned if they didnt. All in all they did exactly what they've been doing since this all started.... kick the can down the road. and they are finding out its not working anymore....
MS was down over 9% today. I do think the market has been saying for months, that this is the next financial stock to go under. The chart is showing a promising head and shoulders pattern. Further downside can be expected.
So lets see…
You have Greece on the verge of default on it’s debt, who almost slapped away help., Who’s Prime Minster decided on Sunday that he does not want to be a part of the process anymore. And now less then 12 hours later it’s all about Italy stealing the headlines. Rumored to be the next Eurozone country to need a bailout of sorts.
When you go to a bank and try and take out a loan, and the bank tells you you’ll be paying 50% interest on that 10 year loan, you would think that’s a problem right? It’s a tad bid of an exaggeration but the
Italian bond rates have been soaring through the roof:
The yield on 10-year Italian government bond topped 6.6% to set a fresh euro-era high in morning trading, according to FactSet Research data.
These are all troubling signs. Obviously these concerns are things to look at when trying to figure out the market direction in US markets. So understanding the short and long term ramifications are key to creating a strategy to profit from it.
More to come tonight on that topic.
Happy Trading Tuesday!