While most of us will start the weekend going bargain-hunting on Black Friday, things in Europe continue to deteriorate.
During the week we saw more signals that the "core" of the Eurozone started to come under pressure and problems were no longer contained to the periphery alone. (core under pressure)
Investors sold off Eurozone bonds across the board Thursday afternoon and Friday after the disappointing outcomes of the meeting between Merkel, Sarkozy and Monti in Strasbourg. Merkel reiterated the need for fiscal responsibility, maintaining ECB political independence and dismissed the idea of Eurobonds as short term solution.
Investors continue to increase pressure on politicians by selling government bonds. A couple of debt markets have already seen inverted yield curves and long term debt above the "non-sustainable" 7% level. Both signs are extremely worrying.
Italy tries to sell Eur 8bn in notes and despite reports that the ECB is active in secondary markets, 2 year yields increased some 25bps to 7.6%, 10-year debt is trading up 10bps at 7.2%
In Spain 2-year bonds traded up as well breaching the 6% level for the first time.
Moody's downgrade of Hungarian debt triggered a massive sell-off in its paper. 10-year bonds are up 110bps to 9.9%. In the wake of the Hungarian downgrade Austrian bonds took a small hit as well as its banks are among the largest investors in Eastern Europe.
Other worrying news this morning is a report from the Financial Times citing European officials who believe the current Eur 440bn ESFS fund can at maximum be expanded to roughly Eur 1tn. Initially hopes were that the fund could be levered up to 5 times towards Eur 2.5tn. Deteriorating market conditions prevent this kind of leverage as major rating agencies would not grant their AAA-rating blessing.
German bond prices rose for the first time this week as a council member of the ECB indicated another interest rate cut would be likely if conditions in credit markets don't improve. Earlier this week a failed German 10-yr bond action rattled the market pushing 10-year yields up 20bps to 2.2%. The move pushed German 10-year yields above those in the US and UK.
The flight to safety over last year shifted a lot of political power from the periphery towards Germany, as investors bought bunds at almost any yield.
Chancellor Merkel has not been able to convert that political power into real decision making by constantly reiterating the need for fiscal austerity while dismissing the idea of Eurobonds. This stand-off in decision making is hurting the Euro reaching new lows, currently trading at 1.3256 against the dollar.
As long as the stand-off will last investors will continue to sell of periphery debt and possibly even the bund. Someone has got to give.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.