Good morning,

Markets are called higher this morning. This is what's happening today:

  • Asian stocks outside of Japan rose with copper after U.S. housing and consumer sentiment data bolstered confidence in the world’s biggest economy;
  • Italy will test markets today with a long-term debt sale after borrowing costs rose to the highest in four months yesterday following inconclusive elections;
  • Federal Reserve Chairman Ben S. Bernanke defended yesterday the central bank’s asset purchases, while reports on U.S. house prices, new-home sales and consumer sentiment beat economists’ estimates;


• 10:30am: Denmark to sell bills

• 11am: Italy to sell up to EU4b 4.5% 2023 bonds

• 11am: Italy to sell up to EU2.5b 3.5% 2017 bonds

• 11:03am: Sweden to sell SEK10b 201-day bills

• 11:03am: Sweden to sell SEK5b 110-day bills

The euro has depreciated 3.9% this month against the dollar, poised to end six months of gains. Italy will seek to sell as much as much as 4 billion euros of a new 10-year bond today and 2.5 billion euros of a five-year note after this week’s vote produced a hung parliament, creating the risk of another election later this year. Comedian Beppe Grillo’s anti-austerity movement won more than 25% of the popular vote. Ten-year Italian yields rose 41 basis points yesterday, the most in 14 months, to 4.9 percent, while the risk premium against German debt jumped 51 basis points to 343 basis points.

Barclays Plc strategists including Huw Worthington wrote in a research report that the vote outcome was their worst-case scenario and they estimate 10-year yields may reach 5%.

The surprising outcome of the vote may force Italy’s President Giorgio Napolitano to call new elections if the coalition led by Democratic Party leader Pier Luigi Bersani, who won the Chamber of Deputies by a thin margin, fails to muster a majority in the Senate.

European Union leaders piled pressure on Italy’s rival factions to form a unity government committed to budget rigor. EU President Herman Van Rompuy warned in Tallinn, Estonia, that backsliding on budget discipline and economic reforms would shatter market confidence in the 17-nation currency union’s crisis management.

In the US, Federal Reserve Chairman Ben Bernanke did not give any indication that the Fed is considering altering its present policy in testimony yesterday. However, he did express worry that the cumulative effects of "front-loaded" budget cuts from the sequester and other recent actions in Congress would be a significant headwind working against recovery.

The Fed is presently pursuing two different policy initiatives. The first is a commitment to keep its target interest rate, the federal funds rate, near zero until unemployment falls below 6.5% or inflation expectations increase a half a percent over the Fed's two percent target. The the second is asset purchases also know as quantitative easing of $85 billion per month.

There are both benefits and costs to these policies. The main costs are the threat of inflation and the possibility of asset-bubbles, but Bernanke added that "In the current economic environment, the benefits of asset purchases, and of policy accommodation more generally, are clear: Monetary policy is providing important support to the recovery while keeping inflation close to the FOMC's 2% objective."

An interesting piece on high yield this morning from a Bloomberg articles reads as follows, 'Wall Street junk-bond underwriters, selling debt at a record pace after the securities returned 19 percent last year, say it’s obvious that prices will drop when interest rates rise. So don’t blame the banks. “Our job first and foremost is to properly structure deals for companies that can support their debt and perform well,” said Craig Packer, the New York-based head of Americas leveraged finance for Goldman Sachs Group Inc. “The interest-rate risk is just a law of nature.”'

Regarding stocks, Valeo is an interesting one to watch. Deutsche Bank have a price target of $53 and the shares are currently trading at $41.90. The following are Deutsche Bank comments on the stock, 'We expect 2013 will be comparable to last year–i.e., a small volume increase and a resilient result, stable operating margin with a limited decline in H1 (-5%e) and a small rebound in H2. And assuming that most of exceptional charges being non-recurrent this year, this could translate into a 7% higher EPS YoY to Euro 5.3. And with Valeo shoares having one of the lowest valuations in the auto part sector, we have a Buy rating.'

For more information on Valeo or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli