Bond-Led Blowout, Key Aussie Jobs Upcoming

Italian bonds crashed below sustainable levels on Wednesday, sending shockwaves through financial markets. USD and JPY led while AUD and EUR lagged badly. Australian employment is the tier one data in Asia-Pacific trading. 7 of our new Premium Trades are arleady in progress, including that key AUDNZD chart ahead of the Aussie jobs report.

We have been warning about the creep lower in Italian bond prices for weeks and when bond clearing house LCH finally raised margins it triggered a cascade of selling that pushed Italys cost to borrow for 10 years almost three-quarters of a point higher to a record 7.50%.

Unless we see a dramatic turnaround in the coming days the yield implies Italy will be forced to turn to its euro area partners for aid. The overarching problem is that Italys debts are the fourth-largest in the world and easily larger than all the other PIIGS nations combined the rest of Europe cant afford a rescue.

The intermarket reaction to the possibility of an Italian bailout or restructuring was intense. EUR/USD fell 300 pips to 1.3521 and other risk assets posted similar, drastic declines. The S&P 500 fell 3.6% to 1129. Precious metals were resilient to a point but later caved.

The way forward for Italy is perilous. The governing coalition is aiming to pass austerity measures by Sunday with Berlusconi stepping down afterwards. But leaders have yet to present the package of austerity measures, let alone secure the support to pass them. At the same time, the EU is asking for further austerity measures and the bond market is prepared to punish any slip up.

In Greece, Papandreou officially resigned today but a meeting to appoint a new Prime Minister widely rumoured to be Parliamentary speaker Petsalnikos ended with an opposition party leader walking out. A new meeting has been scheduled for Thursday.

Further compounding worries are leaks about Merkels party preparing a proposal that would allow members to leave the euro area and rumors of high level Franco-German talks along the same lines.

Asia-Pacific Preview

The lone currency to underperform EUR on Wednesday was AUD. Even during a mid-session bounce in risk appetite, the Australian dollar hovered near the lows on speculation the RBA will further cut rates due to European uncertainty.

At 0030 GMT, Australia is expected to announce the addition of 10.3K jobs but a climb in the unemployment rate to 5.3% from 5.2%. The jittery market will likely respond sharply to any misses beyond 3K.

Other events include Japanese core machinery orders at 2350 (Exp. -7.5% m/m) and Chinese trade balance at 0100 GMT (Exp +$24.9B). Keep a close eye on exports (Exp +16.5% y/y) and especially imports (Exp +23.0%) rather than the headline balance.

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