China meeting with a view to buying Italian bonds fails to lift European stock markets

The small bounce in European stock markets, on the back of talks for China to buy large amounts of Italian bonds and take stakes in Italian firms, was short lived, with investors continuing to take their lead from bond markets, where the benchmark Italian 10-year bond yields continue to race higher.

When the rumours first started flooding the markets last night of the meeting between the Italian finance ministry and China Investment Corp (CIC), China’s sovereign wealth fund, US stocks were lifted around 2% from their lows in response to the news and there has been a follow through into Asia trading also, which did give European stocks support upon market opening.

However, the bounce was short-lived and investors have quickly come to the conclusion that should CIC strike a deal to buy Italian bonds and stakes in companies there, it will not be the long term solution that the markets want to see.

First and foremost, investors have no idea what the size of any bond purchase could be, and secondly China have bought sovereign bonds before and today we still have a huge eurozone debt crisis and so there already exists doubts that any deal could make any long term impact. The reaction in Italy’s bond market this morning, where benchmark 10-year Italian bond yields have risen to over 5.72%, tells a tale that European investors have so far merely shrugged their shoulders at the news.

It is from bond markets that stock markets continue to take their lead and with Italian bond yields rising further, the short bounce in stocks was quickly sold into with the FTSE 100 losing around 1%, whilst the DAX and CAC fell 1.5% and 2.5% respectively.

We may even see more bond woes later this morning as Italy auctions off longer term debt such as 5-year bonds whereby if one takes a lead from yesterday’s 12-month T-Bill auction, yields could be set for another expensive jump in the cost of borrowing for the indebted nation.

Further woes were seen for French banks, with Societe Generale, BNP Paribas and Credit Agricole all losing between 6%-9% yet again this morning, to add to yesterday’s 10% losses.

Commodity stocks have also led the fall in EU indices today, with the miners and oil firms all key drags with investors wanting to see gains in the prices of copper and crude oil before buying back into these sectors.