09-Nov (The Wall Street Journal) — U.S. bank stocks slumped Wednesday as the market turned ruthlessly on Italy, raising fears about the third-largest economy in Europe and its ability to remain current on debt payments.

The latest scare, which sent the yields on Italian bonds above what is considered a sustainable rate of 7%, worried investors in U.S. banks for two reasons: that a faltering by Italy would severely jolt the global economy, and that banks are exposed directly to any default. One clearinghouse had demanded more collateral for trading Italian bonds, signaling the market’s fear.

“The market, at some level, has been held hostage by Europe over the last few weeks and months,” said Steve Sosnick, an equity risk manager at Timber Hill/Interactive Brokers Group. “The financials are dealing with it worse because if clearinghouses are requiring greater margin on sovereign debt, anyone who holds that debt has to potentially put aside money that they otherwise could use more productively.”

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09-Nov (Bloomberg) — U.S. stocks extended declines following a report that German Chancellor Angela Merkel’s party wants to make it possible for European nations to exit the euro area.

The Standard & Poor’s 500 Index lost 3.6 percent to 1,230.66 at 2:11 p.m. in New York, its biggest drop on a closing basis since Aug. 18.

Merkel’s Christian Democratic Union party wants to make it possible for European Union members to exit the euro area, Handelsblatt reported in a preview of an article to be published tomorrow, citing unnamed participants in the discussion.

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PG View: If true, this is huge. Just weeks ago policymakers in core-Europe were adamant that there was no mechanism for countries to abandon the EMU. More recently, the implications of Greece leaving the union were openly discussed, and perhaps now Merkel’s CDU is crafting a framework to allow that to happen. What a difference a couple of weeks make.

If Greece and Italy were to leave the monetary union, might there be a temptation to repudiate their euro denominated debt? We’re not in the EMU any more, but we’ll gladly pay you in freshly printed drachma and lira…

09-Nov (The Wall Street Journal) — We have seen this movie before. Italian government 10-year bond yields are at a euro-era high of 6.7%—a level from which no other euro-zone government bond market has recovered. Increased European Central Bank bond buying has failed to halt the price slide. European banks are dumping Italian bonds at a loss and being rewarded by the market. Given the euro zone’s inadequate bailout facilities, many argue only an unlimited ECB commitment to buy Italian bonds can prevent the debt crisis spiraling out of control.

But investors shouldn’t bank on the ECB doing the market’s bidding. First, the central bank has repeatedly said it has no mandate to act as lender of last resort to countries. To do so would breach European law. New ECB President Mario Draghi said so again last week, stressing the ECB’s bond buying is limited and temporary.

The European treaty is unequivocal: Article 101 prohibits the ECB from lending to governments, while Article 103 says the euro zone shouldn’t become liable for the debts of member states. It would be odd for Mr. Draghi to do something he has said is illegal.

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By Mohamed El-Erian
09-Nov (Financial Times) — Here we go again. Europe’s debt crisis has entered a new, more dangerous phase with the yield on Italian 10-year bonds crossing the seven per cent level on Wednesday morning. This is a eurozone-era record that, if sustained, would severely destabilise the debt situation of the world’s third largest bond issuer and one of the original six founders of the modern European project.

Those who lived through the horrid days of the various emerging market debt crises will quickly recognise the four distinct factors that have come together in the last few days to form a highly destabilising cocktail. And they may well agree on what needs to be done to stop a bad situation getting worse.

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09-Nov (Globe&Mail) — Greek party leaders have named who will head the country’s new coalition government.

Barring any last-minute changes, sources said house speaker Filippos Petsalnikos would take over the post of Prime Minister.

‘We have agreed on Petsalnikos but things can change between now and when the prime minister sees the president,’ a source close to the discussions said.

Outgoing Prime Minister George Papandreou and opposition leader Antonis Samaras had been locked in talks since Sunday on who would lead a new government to take the country to elections in February.

They were under mounting pressure to reach a deal from Eurozone countries which are also grappling with a crisis in nearby Italy.

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09-Nov (Financial Times) — Markets on Wednesday demonstrated a collapse of confidence in Italy’s ability to chart a clear course out of its political and debt crises, sending 10-year bond yields to new euro-era highs over 7.5 per cent and into territory that forced Greece, Portugal and Ireland to seek international bail-outs.

A commitment made on Tuesday night by Silvio Berlusconi to resign as prime minister as soon as parliament passes a package of economic reforms agreed by the EU contained neither a timetable nor a clear political way forward, sowing panic among investors.

“We cannot go on like this. The country is already in the abyss,” declared Emma Marcegaglia, head of the Confindustria business lobby, warning that Italy risked following Greece in the eurozone debt crisis.

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09-Nov (USAGOLD) — Gold remains well bid as the situation in Europe continues to deteriorate. Italy has now moved to the forefront of the eurozone crisis as the market gives a resounding vote of “no confidence” to embattled Prime Minister Silvio Berlusconi. While Berlusconi has said he will step-down, he is attempting to linger until a new financial reform package is passed. A lame-duck government is not what Italy needs right now. Italian yields have surged above 7%, a critical level that promoted other EU countries to seek bailouts.

Similarly, a lame-duck government in Greece is not what the market was hoping for. The uncertainty springing from both Italy and Greece is weighing heavily on markets. Negotiations to find a successor to Greek PM George Papandreou have apparently broken down.

There are rumors this morning that the ECB has called an emergency meeting. The ECB has refused to comment. They could certainly cut the refi rate again, but with the benchmark rate already at 1.25%, there’s precious little maneuvering room. They could probably ramp up bond buying in the secondary market, but there is resistance to this within its ranks — most notably the Germans. The options are really quite limited.

The pseudonymous Tyler Durden of ZeroHedge commented this morning, “It is far more likely that the Fed will print to bail out Europe than the ECB printing.” You know, that may actually not be very far from the truth…

• US wholesale sales +0.5% in Sep, below market expectations of +0.8%, vs 1.0% in Aug; inventories -0.1%.
• UK trade balance (visible) widened to -£9.8 bln in Sep, vs negatively revised -£8.6 bln in Aug.
• South Korea unemployment rate (sa) ticks lower in Oct to 3.1%.
• China CPI falls to 5.5% y/y in Oct, below market expectations, vs 6.1% in Sep y/y.
• China PPI falls to 5.0% y/y in Oct, below market expectations, vs 6.5% in Sep y/y.

09-Nov (NY Times) — Italy’s financial crisis deepened on Wednesday despite a pledge by Prime Minister Silvio Berlusconi to resign once Parliament passes austerity measures demanded by the European Union.

The move failed to convince investors, propelling Italy’s borrowing costs through a key financial and psychological barrier of 7 percent, close to levels that have required other euro zone countries to seek bailouts.

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09-Nov (NY Times) — Negotiations to choose a new Greek prime minister seemed to have been plunged into new confusion early on Wednesday following widespread reports only hours earlier that Lucas Papademos, a respected economist, was on the verge of being named to the job.

The list of candidates mentioned in news media reports included an array of senior figures — Finance Minister Evangelos Venizelos was among them — after Vassilis Skouris, president of the European Court of Justice, was mentioned as the most likely contender.

But analysts said they did not rule out a surprise challenger emerging to succeed Prime Minister George A. Papandreou. After months of protest and building pressure from the European Union, Mr. Papandreou agreed two days ago to step down once political negotiators had established a new unity government. But from the start those negotiations were dogged by reverses.

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Gold Probes Back Above $1800

Gold has traded with an 1800 handle for the first time in 7-weeks. A pretty positive technical picture is helping to underpin the yellow metal, as is continued uncertainty surrounding Europe. It looks like former ECB Vice President Lucas Papademos has been tapped to head an interim “100-day” government. The first order of business is to assure the troika that fundamental changes will be made to ensure the next tranche of bailout money isn’t immediately flushed. Ah, but the new PM in-waiting is a troika man…

Meanwhile, the market continues to squeeze Italy, with yields continuing to establish new euro-era highs, on their relentless march to 7%. Italian Prime Minister Silvio Berlusconi has lost his Parliamentary majority and is apparently on the verge of resigning. I’m not sure who the frontrunners are to replace him, but like in Greece, I would expect at least some contenders to have troika credentials.

Sean Egan of Egan-Jones estimated today on CNBC that the hole in Europe’s finances is a whopping €2.5 trillion. He made a couple of suggestions of how that hole might be filled, most of which are implausible. Basically, austerity isn’t going to close the collective budget gap, nor will Europe be able to grow its way out of debt. Finally, he offer up “massive printing of currency” as a possibly solution, stressing that this would only be possible when the public is ready for it. In other words, the public needs to be afraid — really afraid — before they can have a massive currency devaluation foisted upon them.

Although Egan doesn’t explicitly say it, I was left with the impression that of the solutions proffered, printing may be the most likely. And quite honestly, how else does Europe fill a hole that big in a politically feasibly manner. As is so often the case over the course of history, printing and devaluation is the path of least resistance.

However, Bundesbank president and ECB council member Jens Weidmann took the opportunity to again rain on the easy-money parade, saying that the ECB can’t finance EU “public debt via the money printing press.” Leave it to a German to remove the punchbowl just before the party gets started. Weidmann cites the “key lesson from the experience of hyperinflation after World War I.” Of course, the hyperinflation of Wiemar Germany is the defining moment in German economic history. They have every reason to be concerned about the impact of unrestrained money supply growth to pay down those monstrous debts.

Or perhaps Herr Weidmann — and the rest of Germany — simply isn’t afraid enough yet…

with Katie Stockton – Chief Market Technician, MKM Partners

JK Comment: A nice compliment to Pete’s Daily Market Report yesterday. On gold, Katie states, “I don’t think gold ever even stopped it’s uptrend,” she says, pointing out that the support line runs through about the $1,600 an ounce level. She sees no nearby resistance and “doesn’t think we’re in store for a retest anytime soon.” And as the moderator puts bluntly at the close of the video: “Gold, Buy it here and Buy it Now!”

08-Nov (Bloomberg) — European Central Bank council member Jens Weidmann said the ECB cannot bail out governments by printing money.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Berlin today. The prohibition of monetary financing in the euro area “is one of the most important achievements in central banking” and “specifically for Germany, it is also a key lesson from the experience of hyperinflation after World War I,” he said.

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PG View: Leave it to a German to spoil the easy-money party. Of course, the post WWI nightmare inflation is the defining moment in German economic history, so they have every reason to be concerned.

08-Nov (ZeroHedge) — We had a feeling that the modest upward blip in Greek August deposits by corporations and households, to the tune of €1.4 billion, was a “transitory” event. It was. According to just released data by the Bank of Greece, the September collapse in gross deposits from €188.7 billion €183.2 billion was the largest ever, and took the total to an amount last seen in June 2007. Indicatively Greek deposits peaked at €237.8 billion in September 2009. Said otherwise, in addition to being massively undercapitalized, banks cash in the form of deposit liabilities has plunged 23% from its all time highs.

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08-Nov (Wall Street Journal Blogs) — Italian Prime Minister Silvio Berlusconi failed to muster a majority in a key vote in the lower house of parliament on Tuesday, likely setting in motion a chain of events that could lead to his resignation and the possible formation of a national unity government charged with steering Italy out of the euro-zone debt crisis.

“It is clear the government no longer has a majority,” said Pier Luigi Bersani, leader of Italy’s biggest opposition party, speaking after the vote.

Mr. Berlusconi’s governing coalition garnered 308 votes, seven votes shy of a majority needed in the 630-member lower house of parliament. That means the parliament approved the routine budget bill that was on the ballot, but only because 321 lawmakers abstained from voting.

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08-Nov (The Wall Street Journal) — —Greece’s Socialist Prime Minister George Papandreou is expected to name former European Central Bank Vice President Lucas Papademos as prime minister of an interim government, barring any last-minute hitches, a senior party official said Tuesday.

The announcement is expected later in the day and follows days of talks between the Socialist government and the opposition New Democracy party over a new leader to head the government.

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PG View: All of the serious contenders to succeed Papandreou as Greece PM had ties to the troika (ECB/EU/IMF). Looks like the ECB candidate is about to be installed.

08-Nov (CNBC) — James Rickards says it is the US, not China, that is the biggest currency manipulator. He also reiterates his assertion that if President Obama is going to fulfill his 2010 promise to double exports within 5-years, the only way to accomplish that is to “trash the dollar.”

PG View: Gold is of course the classic hedge against a declining dollar and the inflation that results.

07-Nov (Financial Times) — Chinese gold imports from Hong Kong, a proxy for the country’s overall overseas buying, leapt to a record high in September, when monthly purchases matched almost half that for the whole of 2010.

The buying spree follows a sharp drop in the price of the precious metal. After hitting a nominal all-time high of $1,920.30 a troy ounce in September, gold fell to a three-month low of $1,534 an ounce later in the month. Chinese investors snapped up the metal as prices fell.

Analysts expect the September import surge to continue until the end of the year as Chinese gold buyers snap up gold in advance of Chinese New Year, China’s key gold-buying period.

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PG View: Gold went on sale in September and the Chinese snapped it up!

Gold Continues to Retrace September Losses

07-Nov (USAGOLD) — Gold continues to advance on strong safe-haven interest and the 61.8% retracement level (an important Fibonacci level watched by technicians) has been surpassed at 1772.88. The yellow metal is trading comfortably back above the 50-day moving average and the 20-day has crossed back above the 100-day. All of this is strongly suggestive that the dominant uptrend in gold is re-exerting itself.

Europe remains a mess. While Greece’s embattled Prime Minister George Papandreou has agreed to step down to make way for a unity government, formation of the new government has proven more difficult than expected. Meanwhile, rumors that Italy’s PM Berlusconi will also resign have been refuted, even as yields on Italian sovereign debt reached 14-year highs. The yield on 10-year bonds traded as high at 6.67%, dangerously close to the perceived tipping point into insolvency of 7%.

Germany pretty much put an end to speculation that Europe’s gold had been pledged to collateralize the new and improved leveraged EFSF. German Economy Minister Philipp Roesler said quite succinctly that, “German gold reserves must remain untouchable.” Germany however continues to think that periphery nations that are in trouble — like Italy for example — should sell their gold to lesson the need for bailouts from core-Europe. Nonetheless, as we saw when the topic of Greek gold sales was broached earlier in the year, even in the direst of circumstance, sovereigns continue to view their gold as “untouchable.”

That’s quite a fascinating mindset; that even on the verge of default — when all liquid assets should arguably be in play — nobody wants to give up their gold, or even pledge it as collateral. Such a mindset probably hurries countries like Greece and Italy along the path to default, but presumably they’re thinking that the integrity of their gold reserves will give them at least something to build off of on the other side.

This is hardy a mindset that one would associate with a “barbarous relic.” In fact, this makes gold exactly the kind of asset that everyone should seek to own as a hedge against any number of risks.

JK Comment: The Daily Ticker guys offer some interesting insight on the evolving situation in Europe, and how “contagion” may not be limited to the shore’s of Europe.

07-Nov (ResourceInvestor) — Senior German politician, Gunther Krichbaum, a lawmaker in German Chancellor Angela Merkel’s governing coalition and Chairman of the Committee on the Affairs of the European Union of the German Bundestag has proposed that Italy sell its sizeable gold reserves in order to lower its debt.

Krichbaum, who chairs the German parliament’s European Affairs Committee, was quoted as saying in the Rheinische Post that Italy’s gold reserves are relatively high and could be used to pay off their sizeable debt.

Using periphery nations’ gold reserves as collateral has been on the agenda in Germany for some months with many influential German politicians calling for debtor Eurozone nations to sell their gold reserves.

Angela Merkel’s budget speaker and his opposition counterpart urged Portugal to consider selling their gold in May of this year.

…Gold’s value as money and as a strategically important monetary asset is being slowly realized again.

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07-Nov (Reuters) — Germany Economy Minister Philipp Roesler said on Monday the country’s gold reserves with the central bank cannot be touched, adding his voice to opposition to an idea reportedly discussed at the G20 summit of using reserves to boost euro zone bailout funds.

“German gold reserves must remain untouchable,” Roesler, who is head of the Free Democrats (FDP), a junior partner in Chancellor Angela Merkel’s coalition, told ARD television.

The Bundesbank (German central bank) and a spokesman for Merkel already said over the weekend that they too ruled out the idea reported discussed at the summit of Group of 20 leading economies last week.

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PG View: …which begs the question: In the midst of a major financial crisis, why would any particular asset be deemed untouchable by pretty much everyone from Germany to Greece? Whatever the reason, that’s the kind of asset I want.

07-Nov (Reuters) — Benchmark Italian government bond yields rose on Monday to their highest since 1997 — approaching levels seen as unsustainable — as political turmoil threatened to drag the euro zone’s third largest economy deeper into regional debt crisis.

Italy faces a crunch vote on public finance in parliament on Tuesday and the centre-left opposition said it was preparing a motion of no-confidence in the government that would bring Prime Minister Silvio Berlusconi down even if he should survive Tuesday’s vote.

…Italian yields earlier hit their highest in 14 years at 6.67 percent. Many analysts say yields above 7 percent would make funding costs unsustainable.

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07-Nov (CNBC) — Italy’s economic problems took center stage Monday as its government, led by increasingly threatened Prime Minister Silvio Berlusconi, faced yet another key vote.

The health of the euro zone’s third-largest economy has come into focus despite Berlusconi accepting IMF monitoring and surviving several confidence votes in recent months.

Italy’s size makes the potential consequences if it were to fail more wide-ranging than the much smaller Greece.

“Italy has much more systemic implications,” Thanos Vamvakidis, Head of European G10 FX Strategy, BofA Merrill Lynch Global Research, told CNBC Monday.

“It’s too big to fail, too big to save.”

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