MidSession Review: Smashed Hopes.

Steep losses on Wall Street and in Asia have inspired the downbeat mood across European markets. Yesterday we pointed out that longs were burning.

But nervousness increased as European Central Bank executive board member Joerg Asmussen said the central bank won't take part in any potential debt restructuring of Greece.”The possibility of additional external financing needs can only be closed by the member states of the euro zone,” is quoted to have said Asmussen by the german newspaper Die Welt.

Greece was not the only country under the spotlight: hopes,that the euro zone's bailout fund could soon lighten the burden of countries that are experiencing severe banking problems, were blown out by the Germany,Finland and the Netherlands finance ministers' joint statement issued only on the Finnish ministry's website (whose link we published through our twitter page before the opening bell). The ministers called for use of the European Stability Mechanism's resources to be limited to new applications for aid.

What does it mean? Well, the bill for bailing out Spanish financial institutions estimated at around 60 billion euros will remain ultimately with the Spanish government. Using the statement's word:

Legacy assets should be under the responsibility of national authorities.

As a result yields on 10-year Spanish government bonds rose 24.4 basis points to 5.988, and the Spanish Ibex was hammered down to 7,901.20, or 3.35% lower, pressured by banking and resource stocks.

While the weak GDP data helped push Spain's debt yield higher, to make things worst Prime Minister Mariano Rajoy said he was ready to seek a new rescue package for his country but only if its debt financing costs remained too high for too long.

As to say: please short my debt!!!

Commentators are working on different theory to come out with a valid reason for Mr Rajoy to ask the market to short his country's debt.

The most interesting one conjectures that he may be delaying a bailout request betting that renewed market tension will also force Italy to seek aid and therefore strengthening his bargaining power.

At midsession: Italian 10-year government bonds yield rose 8.5 basis points to 5.17, while the Italian Ftsemib plumped 2.98% to 15,457.79.

As we said in our morning meeting we were focused on the German auction to get a hint.  Germany failed to attract enough demand to meet its 5 billion euro target at a sale of 10-year bonds and it's the second technically uncovered 10-year auction in a month. Do you know what this all mean?

Despite the news coming from Spain and Greece, record lows rate of return deterred investors. The bond offered a record low 1.5 percent interest rate. Therefore if you are on the short side of the market or if you are going to start to build your short position be careful cause we are still in risk on mode.

The euro fell against 11 of its 16 major peers, dropping 0.39% versus the greenback at 1.2849$. The Markit iTraxx SovX Western Europe index of credit-default swaps on 14 governments increased to 141.5, the highest level in a week. Oil fell 1.35% to $90.16 a barrel. The same path was followed by the precious metal: Gold traded 1.07% lower to 1,747.50$.

Pressured by its component the broader Stoxx50 fell 2.16% to 2,513.08.  The DJ Eurostoxx50 December future was unable to test the 500 marks,  but managed to breakout our support at 2,526 in a fast and clear way as expected. Our short bias is paying but the market is still open and anything can happen.

As we said the German auction results are not adding odds to the “short” side.

Originally posted at www.77sigmatrading.com