What’s The Story Morning Glory?

by CC December 19, 2011 9:03 am • Commentary


All’s fairly quiet across Europe this morning, but European bond yields are still mostly drifting higher.

Italy’s 10-year debt recently yielded 6.785%, compared with 1.892% for relatively safe German bunds.

Interestingly, though, German bund yields are about 40 bps higher, so the spread between Italian and German yields has narrowed by about 20 bps.

Spain’s 10-year debt yield is down to 5.132%.

But the yield of Belgium, which was downgraded by Moody’s on Friday, is up to 4.382%.

France, subject of persistent downgrade rumors, is up to 3.114%.


This morning the focus will be back on the euro zone again. Euro-zone finance ministers are in talks about how to beef up support from the IMF. ECB President Mario Draghi appears before the European Parliamentary Committee, where he could be grilled about how much the central bank can help.

That EU summit draft that made the market happy for about two days will get discussed again in Brussels. And the constant threat of a downgrade of France will continue to hang over the market — although Fitch and Moody’s downgraded just about everybody else last week, and the market didn’t bat an eye.

Stocks are higher this morning, in Europe and the US, as European borrowing costs are mostly lower.

There’s little on the US calendar today to distract from Europe — a home builders’ sentiment index and a speech from a Fed president are all we can expect, in a calendar that’s heavily weighted toward the back end of the week, when many in the US will have one eye on the door, or will already be gone for the holidays.


European finance ministers will aim to agree a new €200 billion (£167.7 billion) loan to the International Monetary Fund as part of a deal to save the single currency.

Three quarters of the money is expected to come from eurozone members, but Britain will also be asked to provide funds.

Figures suggest European Union officials expect British taxpayers to be the second largest contributor. The Prime Minister has repeatedly promised not to provide any extra funding for the IMF for the specific purpose of saving the euro and Britain is already liable for £12 billion of loans and guarantees to Ireland, Greece and Portugal.

Earlier this month, EU countries set today as the deadline to raise up to €200  billion in new loans for the IMF to deal with the eurozone crisis.


Asia markets slumped, but reactions appeared muted in U.S. futures and European stocks to the death of North Korea’s Kim Jong-il.


Economists and analysts from Wall Street opine on the market implications of Kim Jong Il’s death:

The chances of a regime collapse have increased with the death of Kin Jong Il. This could be brought about either by a coup or by a failed attempt to reform the political and/or economic system (the Gorbachev legacy). There is a slight chance that regime collapse would lead to anarchy and civil war. However, North Korea’s centralized organization and concentration of power should prevent this worst of all outcomes…A big bang unification comparable to the German model is not an option for Korea. German reunification is estimated to have cost between USD600 billion and USD1 trillion over 10 years, equivalent to 30%-50% of West German GDP. However, the price tag would be significantly larger in the case of Korea, in effect ruling out this option altogether. –Erik Lueth, Royal Bank of Scotland

South Korea most probably has contingency plans that include economic policy measures to military and diplomatic actions. The top priority in economic terms would be to limit market volatility and enhance market confidence. South Korea has currency swap lines with China (USD56bn) and Japan (USD70bn), which should help control the KRW, and if needed, could also reinstate their currency swap agreement with the US…Past experience, from Kim il Sung’s death in 1994 and including other military conflict on the peninsula, strongly suggests that the market will eventually rebound after an initial substantial sell-off. We see this event as posing short-term downside risks to our already below-consensus 3% GDP growth forecast for 2012. –Young Sun Kwon, Nomura


Talks on asset sales intended to help AT&T Inc. win approval for its acquisition of T-Mobile USA have gone cold, according to people familiar with the matter, the strongest sign yet that AT&T may abandon the $39 billion deal.

While AT&T could still try to fight the Justice Department in court, alternatives to a full-blown merger are looking more likely, the people said. Those options include AT&T’s taking a stake in the smaller carrier or doing a joint venture to share network technology, they said.