Markets Lower After Tepid Bond Auction in Italy

 | Dec 29, 2011 07:57AM ET

Equity markets in Asia are showing losses for the third day in a row and this is putting upward pressure on both the US Dollar and Japanese Yen, with EUR/JPY reaching 10-year lows overnight and European bond yields reaching new highs.  Despite this diversification away from risk assets, Gold is continuing its weekly declines but this is seen mostly as a result of US Dollar strength (as gold is priced in US Dollars).

The MSCI Asia Pacific Index was also lower and this latest move brings the yearly decline to 18 percent.  Macro data for the day showed that manufacturing production in South Korea was down for a second consecutive month and today the focus will be placed Italian business confidence slumped and Pending Home Sales from the U.S. (both of which are expected to show declines). The Eurozone debt crisis continues to weigh on trader sentiment and this is currently being exacerbated back a lack of liquidity and trading volumes.

In the US, 10-year Treasury bonds rose to 1.93 percent as markets are anticipate that initial jobless claims also increased during the previous week. The consensus is looking for a rise to 375,000, which would be a reversal of the previous positive trends that have been in place since the summer.  Negative news in the housing data could also contribute to lower equity markets during the session, especially given the elevated levels we are seeing in the Dow Jones and S&P 500.

This week’s Italian bond auction will complete tomorrow with sales of 8.5 billion Euros with maturity dates ranging from 2014 to 2022.  At time of writing, 10-year treasury yields in Italy remain in the 7 percent region after the 9 billion Euro Six-month bond auction yesterday, and the lack of buying interest is still seen as an obstacle for equity markets.  The next Merkel-Sarkozy meeting will take place on Jan. 9th to discuss the next strategies for the European debt crisis.

Oil has dropped back below the psychological 100$ level, seeing a 2 percent drop during the previous New York session.  Part of the decline can be explained by the gains in the US Dollar, and part can be explained by the lower demand forecasts in manufacturing productivity but another factor to watch is the change in inventory levels, which rose to 9.57 million barrels. We will see more data with regard to this today, as the US Energy Department report is expected to show inventories dropped by 2.5 million for the week.  If the forecasts are true, we expect to see a modest rise in Oil during the trading day.