The following were the yield and basis point (bp) movements of some of the most-watched 10-year bonds this afternoon:
US: 2.63% (+1bp)
UK: 2.72% (+2bp)
Germany: 1.76% (-2bp)
France: 2.34% (+0bp)
Spain: 4.46% (+10bp)
Italy: 4.60% (+18bp)
Japan: 0.69% (+0bp)
Portugal: 6.89% (+5bp)
Greece: 9.50% (+3bp)
The first day of the week saw significant losses in the sovereign bonds of Italy and Spain after ex-Prime Minister Silvio Berlusconi announced his intention to withdraw his political party from the country´s current governing coalition.
Analysts at Barclays Research believe that "snap" elections are improbable following the resulting "confidence" vote now expected for this next Wednesday, not least because Berlusconi´s own party may have to pay a stiff price at the polls. Notably, even Berlusconi´s right-hand man, Angelino Alfaro, seems to have dissented with the aforementioned´s reportedly unilateral decision.
Nevertheless, the current government´s ability to pass what some deem as necessary structural macroeconomic reforms of the economy may well be impaired in any case, Barclays explained to clients.
In that same regard, in its latest analysis of Italy, published last Friday, the International Monetary Fund (IMF) identified the two key vulnerabilities for Italian banks as weak profitability and deteriorating loan quality. The economic recovery and/or the normalization of market conditions are seen as necessary conditions for addressing these two important issues, the Washington-based lender said.
Unfortunately, the above broker believes that snap elections could be held in the first quarter of 2014 or early in the second quarter of next year.
Writing on the outlook for European credit markets analysts at Royal Bank of Scotland stated that they: "expect spreads to widen 10-20% over the coming weeks - however deleveraging, stable fundamentals and strong technicals leave our medium-term positive stance on European credit intact."
No less relevant, markets are expectant ahead of this evening´s legislative session in the US Senate. Congressmen must thrash out an agreement by midnight if they wish to avoid a partial shutdown of the federal government.
At least some analysts remain sanguine that such an event can still be avoided, or at least kept to a short duration. We will learn the answer tomorrow.
On a more positve note, the US Chicago NAPM regional manufacturing sector purchasing managers´ index improved to 55.7 points for September, from 53.0 in the month before (Consensus: 54.0).
Meantime, and in Spain, also on Friday the government approved its budget for the fiscal year 2014, with some analysts still considering it likely that if the country delivers on its commitments then that would be consistent with a falling debt-to-GDP ratio from 2016 onwards.
Be that as it may, its yields were dragged higher by the events taking place across the Mediterranean, in Italy.
Lastly, and back in the UK, the MPC´s David Miles has today reportedly indicated that the MPC must not raise rates too soon.
Also with implications for monetary policy in Britain, the expected rate of inflation over the next twelve months fell to 2.5% in September from 2.6% in the month before, according to a monthly survey from YouGov.
UK money supply increased at a 0.7% month-on-month clip in August, as forecast by the consensus.