Italy fears bring markets back down to Earth
2011-OCT-31
Stock ticker A sharp rise in yields on Italian government bonds on Friday cast a shadow over the backslapping congratulatory mood among European leaders
– a reminder that despite last week’s deal, the eurozone remains mired in serious difficulties. Pressure has grown on Italy this morning, with news that the country’s unemployment rate increased by 0.3% from August to September, and now stands at 8.3%. The yield on 10-year Italian government bonds has climbed by 0.12% this morning, and now stands at 6.12%. Yields on equivalent Spanish bonds have risen by 0.15% to 5.62%. Economists regard interest rates of over 6% on 10-year debt as unsustainable.
With concerns about Italy growing, the euro has fallen against the dollar. In addition, the dollar has vaulted dramatically higher against the Japanese yen in trading today, as the Bank of Japan (BoJ) has once again intervened in currency markets in order to weaken the yen – which last week touched a post-WWII record high against the US dollar, with the USD/JPY touching 75.31. Analysts note “persistent” intervention from the BoJ, and think that today’s yen sales by the bank may have equalled the 4.5 trillion yen ($59bn) sold on August 4 – the biggest one-day intervention by BoJ thus far.
As a result, the dollar has surged by 4% against the yen this morning – with the Dollar Index (USDX) rising by 100 basis points, and is now just above 76. Gold and silver prices have been hurt by this dollar rally, with the gold price sinking by around $35 dollars and silver moving below $35 per ounce. However, the King World News Blog features a piece from Hinde Capital’s Ben Davies, who notes the strength in the gold price that has tended to characterise the time from November until the end of March over the last decade. This is owing to increased buying associated with festival celebrations in India, and to a lesser extent, China. Thus, this morning’s fall in gold and silver prices offers a good opportunity to “buy the dips”.
Furthermore, with the BoJ printing trillions more yen – as well as indications that new European Central Bank president Mario Draghi (who takes over tomorrow) will be much more “accommodative” than his predecessor Jean-Claude Trichet – precious metal prices remain well supported by central bank policies. The pressure on Draghi for increased money printing will be particularly intense, given the growing spread between Italian and German borrowing costs over the last few months. An Italian default or bond “restructuring” – similar to last week’s Greek proposals – would have catastrophic consequences for the world’s banking system, and could lead to a financial crisis of epic proportions, affecting countries all over the world.
Investors will receive good indications of Draghi’s views on Thursday, following his first ECB policy meeting. Signs that the ECB will lower interest rates and print more money will lead to more people – not least Europeans – looking to buy gold and silver.
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  "All truth passes through three stages. First, it's ridiculed, second it's opposed, and third, it's accepted as self-evident." (Arthur Schopenhauer)
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