Monti Appointment Fails to Arrest Italian Bond yields

Arthi Gupta
14 Nov, 2011
New York City

European indexes traded lower after Italy sold

[R]4:10 PM Frankfurt – European indexes traded lower after Italy sold €3 billion of 5-year bonds at 6.3% and yield in the secondary market increased to 6.6%. Mario Monti was appointed as the new prime minister in Italy. Hochtief plunged 9.4% after lowering fiscal 2011 outlook.[/R]

European indexes declined after Italy sold €3 billion of 5-year bonds at higher yield. However, the markets rallied in early trading after Mario Monti was appointed as the new Italian prime minister.

Monti New Italian PM

Mario Monti, an economist and former member of the European Commission was on Sunday appointed Italy's new prime minister succeeding Silvio Berlusconi. Berlusconi fulfilled his pledge to resign after the parliament passed austerity measures this weekend.

Monti government is expected to include technocrats and no politically appointed minister and won the support of the three leading parties including the conservative party controlled by the former Prime Minister Berlusconi.

However, the task ahead for technocrat led Monti-government is not easy. Italian economy has stagnated for more than a decade, labor markets are rigid and tax evasion is widespread. In addition, the government debt is still growing.

The length of the new government and composition of the ministers is already a subject of controversy among lawmakers.

Sources close to President Giorgio Napolitano and Mario Monti indicate that the new government will be in place at least till 2013 when the next elections are scheduled to take place.

However, several lawmakers in the People of Liberty party are opposed to such a length of the tenure. Also, none of the major parties are willing to participate in the new government forcing Monti to appoint technical experts only.

Italy's sovereign debt is estimated to be at €1.9 trillion or $2.7 trillion and the country's debt-to-GDP ratio at 120% is way above the EU limit of 60%. Also, the yield on Italian ten-year bonds rose to a record high of 7% on Wednesday and is likely to stay at a level that the economy cannot sustain.

The Italian Treasury sold €3 billion of five-year bonds at 6.29% yield, up from 5.32% at the last auction on Oct. 13. The yield declined from 6.45% in Friday’s trading and the bid-to-cover ratio improved to 1.47 from 1.34 last month.

However, sceptical markets drove up the yields of Spain, Italy and France in trading.

In the secondary market, the yield on the 10-year bonds increased 20 basis points to 6.62% and Spanish bond yield increased 17 basis points to 5.96%.

In Paris, the CAC-40 Index declined 21.59 or 0.7% to 3,127.79 and in Frankfurt; the DAX Index edged lower 22.04 or 0.4% to 6,034.99.

In Asia, Japan's gross domestic product rose an annualized 1.5% in the third quarter of 2011 following a 0.5% contraction in the second quarter, the Cabinet Office said today. The economic activities rebounded after exports surged and production disruptions eased and electricity shortage that was feared did not materialize.

Euro-zone Output Eases

Industrial production in the euro area increased 2.2% from a year ago in September as against the 6% growth in August.

In EU27 region production grew 2.2% in September, slower than the 4.8% growth recorded in August.

German Factory Employment Up

The number of employees in the manufacturing sector grew 3.6% in September to just under 5.2 million compared to September last year, the Federal Statistics Office said.

Gainers & Losers

Bauer AG rose 2.8% to €21.05 after the earth-working and groundwater field machinery maker said for the nine-month period total group revenues increased 4.8% to €1.008 billion from €962.6 million in the prior year. Profit in the period declined 32.6% to €14.2 million or 0.70 euros per share, from €21 million or 1.01 euros per share reported a year ago.

Hochtief AG plunged 9.4% to €46.29 after the German builder reported third quarter consolidated net profit rose 81% to €98.7 million compared to €54.6 million last year.

The company lowered its outlook for fiscal 2011 citing possible delays in the sale of its airport activities due to challenging market conditions.

HomAG Group AG gained 2% to €8.65 after the manufacturer of machines and equipment for the woodworking industry said third quarter sales revenue grew 20% to €204.6 million from €171.0 million in the prior-year quarter. Net profit after non-controlling interests soared 800% to €2.7 million or 17 cents a share, from €0.3 million or 2 cents a share in the same quarter a year ago.

Q-Cells SE slumped 19.9% to €0.93 after the German solar cells maker reported third quarter revenues plunged 43% to €228.8 million from €401.6 million in the prior year, as production dropped to 156 MWp from 305 MWp last year.

Net loss in the quarter, after minority interests, widened 187% to €57.1 million compared to €19.9 million a year-ago quarter.

UBS AG climbed 0.5% to Sfr11.06 after the financial services company is expected to confirm Sergio Ermotti as Group CEO, according to a report in a Swiss weekly on Sunday.

UniCredit SpA increased 1.1% to €0.83 after Italy's largest bank by assets, is considering a proposal to raise up to €7.5 billion, or $10.3 billion, in capital in a rights issue, the Bloomberg said.

VimpelCom Ltd. soared 3.6% to $11.26 after the mobile phone operator reported third quarter net operating revenues surged 116% to $6.09 billion from $2.82 billion in the prior-year period. Net income in the quarter plunged 79% to $104.37 million or $0.07 per share from $496 million or $0.39 per share a year earlier on non-cash forex related items.

The company's total mobile subscriber base increased 11% from a year ago to 199 million by the end of the third quarter and surpassed the 200 million mark in October.