Still Waiting on Europe

With nothing major on the domestic economic calendar today, Europe’s woes will remain front and center once again. The drop in the exchange value of Euro against the dollar to its lowest level in 11 months is another sign of the market’s lack of confidence in last week’s EU deal. We are also seeing a renewed uptrend in Italian government bond yields today.

Italy paid a Euro-era high yield of 6.47% in a 5-year bond auction this morning amid weak demand. At the other end of the risk spectrum, demand in a 2-year German government bond auction was so high that the yield dropped to a low of 0.29%. The yield on Italian government’s 10-year bonds has moved back up to 6.7% and is trending upwards.

The European Central Bank (ECB) was expected to play a more active role in the government bond markets following the Friday deal, but hasn’t come through yet. The bond market appears to be unimpressed with the outcome of Friday’s summit and doesn’t seem willing to let up the pressure in the absence of the ECB assuming a more prominent role. Mario Draghi, the ECB president, had himself helped build these expectations ahead of the summit, but his institution has since been effectively been missing in action.

Mario Monti, the prime minister of Mr. Draghi’s home country of Italy, stated in a speech to the country’s Senate today that he had argued vigorously in the Friday summit for the mutualization of debt and the issuance of Euro-bonds. He stated that while Euro-bonds were not mentioned in the final statement, they were heavily discussed in the meeting and would be on the agenda of EU’s March summit.

Euro-zone leaders have consistently been in a catch-up mode with the bond markets since the start of the crisis almost two years ago. But their halting responses have proved to be inadequate thus far, though the move towards greater fiscal union seems to be the first stage in the eventual federalization of the currency union. With Euro-bonds on the EU’s March summit agenda per Mr. Monti, the next steps in the union’s evolution are becoming clearer. But it remains to be seen if the markets will be willing to give the leadership the time to build consensus around those objectives.

In corporate news, Avon Products (AVP - Analyst Report) is looking to hire a new CEO, replacing Andrea Jung, who will become the company’s executive chairman. We also have a weak earnings outlook from First Solar (FSLR - Analyst Report) and the announcement of a major secondary stock offering from Cheniere Energy ((LNG - Snapshot Report).

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