Happytradersfx briefs

ITALIAN YIELD BREAKS THE LINE IN THE SAND

Italian 10 Year Bond Breaks Above 7%!

Europe opened positive and I was looking for another boring day when bond players jumped on Italian bonds. The yield on the 10 year breached the major psychological 7%, a level that is regarded as the breaking point in terms of Italy being able to meet its payment obligations. As soon Italy's borrowing cost touched the 7% Italy dropped hard from gains of up to 1% at the open and dropped into negative territory of over 1%. The yield of the 10 year bond eased on some intervention play from the ECB but soon tested 7% and finally broke above. That's when we saw a sea of red in Europe with indices dropping as far as 4% and NY futures dropping to losses of 2%.

Italy is Europe's third largest economy and has been noted as Europe's breaking point. With yields climbing well above 7% the view turned very negative on Europe. The major 7% has been long quoted as the max yield that Italy can afford to pay out. Above that level is seen as a level that Italy is unsustainable.

The focus is now on Italy and we will soon hear calls that Italy will require emergency aid. It also brings into further turmoil the European Union and fears of a breakup of Europe in its current state.

News reported by Reuters that German and French officials were in discussion over plans for a radical overhaul of the European Union that would involve establishing a more integrated and potentially smaller euro zone caused further panic in the markets helping to keep North American markets under pressure. S&P500 closing down 3.67%, DOW down 3.2% and the Nasdaq down 3.88%.
At the G20 in Cannes last week, German Chancellor Angela Merkel and Sarkozy did comment that Greece could theoretical drop out if the euro zone if that was required for the EZ's long term stability but the comments had little impact. Today's comments however from Germany provide more substance and have been heard loud and clear by market players. Basically, the message now is for the 12 year project to return to its original objectives: strong economies sharing a common currency.




Check out the inverted yield curve!




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According to Reuters Japan has continued to intervene in the fx market since it pushed usdjpy up on October 31st.

If this is correct it marks a change in tactic in fx intervention for Japan which in recent years use a more direct approach of earlier warnings followed by a press statement after the fact. Trading evidence provided by Reuters showed that Japan most likely continued to intervene using a stealth approach using small amounts to curb the fall of usdjpy. By law, the govt does not have the right to print cash directly and it must fund intervention by issuing financial bills, usually Fbs of 3 months. The Ministry of Finance sets the intervention cap and the Bank of Japan, which is legally independent, prints the cash and conducts the operations.

Unless the govt increases the intervention cap, which it recently did with a supplementary budget, the BOJ still has roughly 38 trillion yen of ammunition of the 165 trillion legal cap. To put things in perspective, the BOJ total intervention amount from 2003 to 2004 when it intervened in the markets was 35 trillion.

Clearly is too early yet to call all the ammo spent.

Other than debating another supplementary budget in a split parliament to increase the cap, the govt can sell foreign assets to the BOJ and use the proceeds to fund further intervention. It is estimated that this could provide an easy additional 10 trillion plus...