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I seem to recall EU leadership stating that it would not be dictated by the market. The point was that Europe needed to find the right solutions for its problems, and that it wouldn't be forced to rush that solution based on fluctuations in the financial markets.
That was before the yield in the 5-year Italian note hit 7.7 percent, as it has this morning.
I wrote yesterday that 5-year yields at 6.7 percent were unsustainable. But 7.7 percent is just plain ridiculous and we have to wonder if Italy is willing to pay out this rate. Even if Italy is willing, it certainly can't pay 7.7 percent yields for long. Let's not forget that it was these yield levels that forced Greece, Ireland and Portugal to request aid. Bailing out a $300 billion economy like Greece is one thing. Bailing out Italy, a $2 trillion economy, is quite another.
It seemed as though the market was pleased when Italian Prime Minister Silvio Berlusconi said he would resign after the new budget passes. Gold sold off on the announcement, which seemed like a "risk on" move. But today, the market is clearly displeased and is demanding a sacrifice. That sacrifice must be Italy's timeline for the budget vote and implementation of a new government.
We should see some kind of action on Italy in the next 24 hours. Whether that's the ECB stepping up its purchase of Italian bonds or Italy announcing a vote on the budget today or Berlusconi actually quitting — something will happen soon.
What Oil Prices Are Saying
Clearly, with uncertainty rising in Europe, the euro is getting crushed against the U.S. dollar. Dollar strength has equated to stock and commodity weakness for the last couple of years. Today isn’t likely to buck that trend. Even gold was down in pre-market trading. Oil is down more, of course. Not only is oil priced in dollars, but the Italian situation implies that growth could slow. And in a nice Catch-22, slower growth expectations push investors onto the dollar
That's a double whammy that won't be reversed today. This dip in oil prices can be used as an entry point. My preference would be to buy oil stocks when oil is around $90 a barrel, but we'll see. In the meantime, consider the recent escalation in oil prices as a glimpse of what's possible without the EU weighing on the market
Yes, the U.S. economy has done much better over the last couple of months. It's unfortunate that this improvement has to come at the same time as all this EU stuff. But the U.S. and EU economies are simply at different stages of recovery. One can imagine Europe performing much better a year or two from now, once its debt issues have been resolved.
One Crisis at a Time, Please
Inflation was down slightly again in China. That's a good thing. Many investors are concerned that inflation could be the catalyst to bring down the Chinese economy. That's because inflation can easily run faster than wages can grow. And if the Chinese people get priced out of their own economy, well, that would be bad. Prices would fall, and goodness knows how much poorly invested capital would be lost.
It's no secret that China's banks and government have funded massive investments in the real estate and industrial sectors. Rising prices are the main threat to recouping those investments.
With Europe's problems, it's a darn good thing China is improving. One crisis at a time, please…
*****Write my any time: [email protected]
Until tomorrow,
Ian Wyatt
Editor, Daily Profit