Does anyone even read the news anymore? Italy calmly raised upwards of €15bn in the early part of this week, despite the country being seemingly no closer to forming a government than it was after the general election nearly two months ago and having the added constitutional complexity of finding a new president this week.
Its peripheral partner Spain sold six month and 12 month bills at record low yields on Tuesday despite unemployment levels of around 26% and pitiful growth forecasts.
And the bad news keeps coming. The International Monetary Fund revised its eurozone GDP outlook on Tuesday afternoon. It now expects output to fall by 0.3% this year, having forecast a 0.1% drop as recently as January.
But the announcement is expected to make little difference to Thursday’s auction of medium to long term Spanish debt.
Both Italy and Spain’s funding needs may also increase as the sovereigns look to pay off debt owed by their regions to private suppliers — totals of €40bn and €15bn respectively.
That initiative has been rightly welcomed as a sensible step to help their private sectors get moving. But, once upon a time, wouldn’t investors have taken such news as a sign to pull back a bit? Struggling sovereigns increasing their funding targets certainly used to have an effect on yields.
It appears that this rally is still based on nothing more than European Central Bank president Mario Draghi’s three little words last July: “Whatever it takes.”
It is hard to see what else has changed at a fundamental level.
While Draghi had to do something to tackle the skyrocketing Italian and Spanish yields last year, the rally has surely gone too far.
Spain seemed odds on for a bail-out late last year but its plunging yields removed the urgency. Yields have kept on falling regardless of how bad conditions are on the ground.
The fundamental reasons for a possible Spanish bail-out have not gone away, even if the capital market forces have.
This crisis still has room to surprise. Investors need to wake up to the fundamentals.