Italy Bond Auctions in Focus as Downgrades Dominate

Italian bond auctions in focus ahead of Italy austerity budget vote, Fitch downgrades Greece, Moodys warns US as debt talks stall while Bernanke hints at QE3, US retail sales and jobless claims due, Gold and Swiss franc surge

Todays focus in Europe is likely to be the series of Italian bond auctions due later this morning with a range of maturities from 2016 to 2026. Given that this time last week 10 year bond yields in Italian paper were around 5% and now they are at 5.5%, albeit down from this weeks highs at 6.05%, these will be watched closely. The potential for failure here could be quite high, if there is any doubt about the conviction of Italian politicians to pass the austerity budget.

Given that Fitch downgraded Greece late last night three notches to CCC, following on the heels of Moodys downgrade of Ireland the night before, the stakes couldnt be any higher.

This mornings Euro zone CPI numbers for June are likely to be no more than a foot note when set against this backdrop, but are set to remain at 2.7% with core CPI remaining at 1.5%, highlighting the folly of the ECB in hiking interest rates last week.

Late last night ratings agency Moodys decided to invite the US to the downgrade party putting a rocket under the Democrat and Republican politicians as the talks on the debt ceiling appeared to be hitting the buffers once more. The review of the US government's bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes. As such, there is a small but rising risk of a short-lived default.

Coming as it did on the back of Bernankes testimony to Congress where he gave the impression that the Fed would consider further QE if the economy continued to slow, the news sent the dollar into a nose dive.

The fact that further QE would be politically difficult to implement has been overlooked for now by the markets as the USs own debt problems get an airing in the market. Even so given the backlash the last stimulus package received at home as well as abroad, there has to be some doubt as to whether further QE would receive the support it would need.

The current weakness in the US dollar is not likely to play well with Japanese authorities and could make the current weakness extremely nervy and choppy, with intervention always a threat.

US retail sales for June are expected to highlight that the US consumer remains under pressure from increasing prices, while weekly jobless claims are expected to slip back slightly.

As would be expected safe haven assets gold and the Swiss franc have surged to record highs with more gains seeming likely.