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Italian Bonds Hold Traders' Attention

Traders, across the financial markets and around the world, expect to spend another day Tuesday watching Italian bonds.

Statue and Italian Flag in front of Vittorio Emanuele monument.
Ian Cumming | Getty Images
Statue and Italian Flag in front of Vittorio Emanuele monument.

The Italian 10-year yield reached a euro-era high of 6.7 percent Monday, as investors followed every headline about Prime Minister Silvio Berlusconi as he defiantly clung to power ahead of Tuesday's parliamentary vote on budget reforms. The world's third largest debtor nation has taken centerstage in the European sovereign debt crisis, as investors worry Berlusconi's government is not serious enough about reining in costs.

"Berlusconi has to go. I think the market sees through it. You need leadership in these countries that's going to be able to enforce the austerity packages," said Steve Massocca, managing director at Wedbush in San Francisco.

Rick Klingman, who runs the Treasury trading desk at BNP in New York, was also watching the Italian bonds. "If you see 7 percent yields, (the U.S. 10-year) will probably be trading at 1.90...then I'd be afraid to be long our market because at 7 percent they're going to have to do something big," he said. The U.S. 10-year was yielding 2.02 percent late in the day, but it had fallen to 1.95 earlier in the session.

Greece, working on its own governmental transformation, was expected to announce a new prime minister Tuesday. A morning cabinet meeting has been called by Prime Minister George Papandreou, following a day of talks Monday over who would lead the new coalition government.

"I keep wondering if we're going to decouple, and look at the European situation at some point ,and say it's not as important as we make it out to be," said Massocca. Were that to happen, he said the market should rally.

"But if we continue to focus on Europe, (stocks) could go down," he said. Massocca notes that the U.S. earnings season went well, and companies are more profitable than expected, with 71 percent of the S&P 500 beating expectations.

Stocks traded quietly Monday, ending the day with gains but trading on extremely light volume. The Dow was up 85 at 12,068, and the S&P 500 was up 7 at 1,261.

"The market is just frozen. It feels frozen. I don't know what will drive it one way or to the other," said John O'Donoghue, who heads equities at Cowen. But "as much as we're all sort of sitting around and wringing our hands, the market's not doing that badly."

While investors were fretting about Europe, U.S. capital markets showed some interesting signs of life. After Groupon's well received IPO last week, there were 13 initial offerings on the calendar for the next two weeks, according to Renaissance Capital.

In the corporate bond market, issuance of investment grade debt topped $15 billion and another $5 billion in high-yield also came to market Monday, making for the third busiest day of the year for debt offerings, according to Thomson Reuters IFR.

What to Watch

The Treasury auctions $32 billion in 3-year notes at 1 p.m. Tuesday.

RBS senior Treasury strategist John Briggs said he expects the auction to go well. "There's enough global uncertainty and bank capital needs... It'll go fine. The 10-year (auction Wednesday) will also go fine. The (30-year) bond (auction Thursday) is going to be the most interesting one, with yields close to 3 percent... It doesn't have as diverse an investor base," he said.

There are a few reports to watch Tuesday, including the NFIB small business survey at 7:30 a.m. EST, and the Job Openings and Labor Turnover Survey at 10 a.m.

Earnings are expected from Toyota Motor, Vodafone, Fossil, International Flavors and Fragrances, Liberty Media, Progressive Corp, Rockwell Automation, Scotts Miracle-Gro and HollyFrontier, before the opening. ActivisionBlizzard,International Game Technology and Take-Two Interactive report after the bell.

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Price
 
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%Change
FHGUAX
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FOSL
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HFC
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IFF
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IGT
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PGR
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ROK
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SMG
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7203.T
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TTWO
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VOD
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McDonald's reports its October monthly sales ahead of the bell.

Fed speakers include Minneapolis Fed President Narayana Kocherlakota, who speaks at 1 p.m. on the economic outlook, and Philadelphia Fed President Charles Plosser, who speaks at 1:30 p.m. in Philadelphia on monetary policy.

Follow Patti Domm on Twitter: @pattidomm

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