Fresh ECB SMP Cap Italian Yields, EUR Consolidates

Deflationary pressure continue in Switzerland; Papademos likely new Greek PM; PM Berlusconi rumored to resign today; European data disappoints again. The ECB's securities markets program is back in play as the bank buys more Italian bonds, dragging down 10 yr yields to 6.48% from the day's high of 6.64%. Swiss deflationary pressures continue to emerge as CPI declined four times out of last five months on soaring CHF.

Risk aversion kept USD bid at the beginning of the London session sending it higher across the board. Over the past two hours, the greenback gave back a portion of its gains. EURUSD trades around 1.3770 after touching 1.3680 earlier. European equity markets are losing about 1%.

Deflationary pressures continue to emerge in Switzerland as CPI declined four times out of last five months. In October consumer prices declined -0.1% which pushed the yearly figure to -0.1% from previous +0.5%. Unemployment rate has stayed unchanged since May at robust 3%. CHF has been under pressure as the SNB's chairman Hildebrand reiterated over the weekend that the SNB could act further to negate the impact of the strong Franc. Rumors that EURCHF floor could be lifted higher have been circulating over the past few weeks and deteriorating data with negative inflation increase the likelihood of such a step. EURCHF trades 140+ points above Friday's close around 1.2345.

In Greece, new national unity government will be formed and PM Papandreou will step down so new leader that will implement the bailout plan austerity measures can be voted in. Former ECB vice president Papademos is eyed as a new PM Dow Jones reports.

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News headlines regarding developments in Greece have been impacting market sentiment for months. As the Italian 10 year yield moved above 6% by the end of October, traders' attention has been slowly but surely shifting to Italy. The situation could become more complex as the political situation is getting more unstable. PM Berlusconi asserted that he still has parliamentary majority but the increasing number of defectors could bring the government down. Even two Berlusconi's ministers questioned if the government could continue. Rumors that PM Berlusconi could step down today appeared earlier. Italian 10 yr bond yield are now dropping to 6.48% from the day's high of 6.64% as ECB buys more Italian paper. The spread between Italy& German 10 yr bond yields slips to 4.66% from the day's high of 4.86%.