European Crisis Live: Markets Fall After Tough Debt Sales, Poor US Data Add to Investor Concerns

1530 BST: Fifth bailout gets closer

Cyprus may be the fifth Eurozone member to seek financial assistance, according to recent reports. Today Finance Minister Vassos Shiarly told a conference in Nicosia that it would need to either recapitalise its second-largest bank or seek a bilateral loan of up to €4bn to steady its domestic finances.

"Our first choice ... would be for the recapitalisation of banks to be effectively dealt with through private solutions. But based on present circumstances, there is a high possibility the state would have to intervene to support one of the Cypriot banks," Reuters reoprts Shiarly told an economics conference. "This support would either come from a bilateral loan from a third country, or through the EU's support mechanism."

1510 BST: Silly as it sounds

You get the sense that a lot of the Street has turned away from their screens to watch the Jamie Dimon testimony to the Senate Banking Committee. It's all gone too quiet.

1435 BST: Spanish yields at session high

Bond market weakness in Europe continues with benchmark 10-year Spanish debt trading at a day-high 6.74 percent. Italian 10-year bonds are also higher, up 7 basis points on the session to a mid-market quote of 6.215 percent. The Spanish/German spread (10-year Bunds are quoted at 1.46 percent) is now trading at 528 basis points. The Italian/German spread is 479 basis points.

1405 BST: Bailout odds

A Reuters poll hitting the tape just now suggests 35 of the 59 economists it asked believe Spain will seek a broader European bailout within the next 12 months. Only 37 of the same 59 feel the Eurozone will exist in its current form by this time next year.

[UPDATE:] The same poll in April found that the same group considered a Spanish bailout to be a "one-in-four" probablity.

1400 BST: The Genius of Mutual Indebtedness

Perhaps the most famous sceptic of the European Project, self-confessed "fifth columnist" and European Parlimentarian Nigel Farage of the United Kingdom, weighs-in to his fellow MEPs on the latest turn in the region's sovereign debt crisis.

In factual terms, it's a bit weak. As a polemic, it works rather well! Definitely worth the three mintues.

1345 BST: Euro stronger

The weak US retail sales are starting to confirm market assumptions of another round of quantitative easing from the Federal Reserve. As such, we're seeing gold pop about $10 an ounce to xxx and the single European currency rise to a session-high $1.2555 against the greenback.

1330 BST: Back at it

Had to edit a couple of interesting reads (a piece on the future of VaR after the JPMorgan loss and a piece comparing the differing fortunes of Tesco and Sainsbury's in the fiercely competitive UK retail market)

US retail sales for April hit the Street estimate on the nose, falling 0.2 percent. A consumer-led recovery in the world's biggest economy, it seems, isn't going to happen anytime soon. Strip away car sales and they fall 1 percent, which would be the biggest dip in two years.

Meanwhile, Producer Prices fell the most in nearly three years, with the May reading of -1.0 percent well past the Street consensus of 0.6 percent. Year on year, the decline was measured at +0.7 percent.

I'd read the figures are marginally equity positive (companies have more margin cushion if PPI is falling) but stock futures are paring gains and US Treasuries are starting to tick higher.

1100 BST: Red again

Stocks are reacting poorly to the two disappointing bond auctions from Italy and Germany, with the DAX turning negative for the session and most major European bourses following suit.

Germany's sale seems particularly troubling to market commentators, given the Bundesbank's need to hold back around €958m of the planned €5bn sale, but the coupon is so low (1.75 percent) that it's hard to entice buyers when they can find similar risk elsewhere (France, Netherlands, EFSF bonds) which much higher rates of return.

Italy's sale, for my money, should be the worry. Domestic banks typically use Treasury bills as part of their everyday liquidity. When a central bank has trouble placing its own debt with its own banks, there's a problem. The near 4 percent the Tresor has had to pay on the one-year paper is a stark reminder of the stresses in and around Italy's banking system

1045 BST: German bond auction

Germany's benchmark ten year auction (which carries a 1.75 percent coupon) is also through, with the €4bn sale coming in at an average yield of 1.52 percent (compared to the record low 1.47 percent in the previous sale on 16 May). Demand was muted: (€1.44 bid for every €1 on offer) compared to €1.49 bid in the May sale.

Germany trimmed the overall size by €1bn after getting only €5.8bn in total bids.

1005 BST: Italy bond auction

Itay's 12-month bill auction is hugely expensive - the 3.972 precent rate is the highest the Tresor has had to pay since December of last year.

The €6.5bn sale had a lower "bid-to-cover" ratio (a common gauge of demand: 1.73 versus 1.78 at the last sale) than the previous sale on 11 May and was 138 basis points dearer.

1000 BST: Falling production - just not as much

A rare bit of positive economic news this morning as Eurostat publishes Industrial Production figures for the month of April. Output fell 0.8 precent from March and 2.3 precent from April 2011. Both figures are marginally better than analysts had been anticipating.

0930 BST: Stocks turn red

It's a relatively quiet session - at least until we hear results of the mornings' debt auctions in Germany and Italy - but stocks are starting to lose some of their early steam. The Europe-wide FTSE Eurofirst 300 has dipped lower on the day by 0.1 percent to 989.39.

We're seeing improvement, however, in Spanish and Italian debt prices at the same time, with 10-year bonds for the former trading at 6.71 percent and the latter at 6.15 percent. Five year credit default swaps costs for Italy (-14 basis points to €548,000) and Spain (-12 basis points to €595,000) are also moving in a positive direction.

0855 BST: Cash Crisis?

Both Bloomberg and Reuters are reporting this morning that larger Greek banks are seeing major cash withdrawls (in the region of €500m to €800m) in the run-up to this weekend's Parlimentary elections.

The Athens Stocks Exchange General Index is trading 0.6 percent higher this morning at 492.25 while the Euro STOXX Bank Index is around 1 percent higher at 83.07.

0840 BST: Bailout Terms

Spain's El Mundo daily newspaper is reporting details of the €100bn loan negotiated between Prime Minister Mariano Rajoy and the European Union. The paper, citing unnamed sources, says the deal calls for a 15-year loan at 3 percent interest, with a five year grace period that would begin demanding payments in 2017.

Should make for interesting reading in Dublin, Lisbon and Athens.

0820 BST: Bund Bites

There's a decent amount of social media chatter regarding this morning's moves in the bund market, where 10-year German yields have hit a one-month high of 1.52 percent. Some are even suggesting this might be the first "cough" of contagion into the core of Europe. I'm utterly unconvinced.

Inflation figures published this morning for Europe's largest economy showed mild increase in the preferred measure (Harmonized Index of Consumer Prices) on an annual basis (+2.2 percent versus an expected 2.1 percent). Even a slight uptick will normally add a few basis points to bund yields as investors adjust real yield assumptions. (And, don't forget, German wage increases have been pretty hot this year).

Secondly, the market had to take down around €1.5bn in longer-date debt from the EFSF (incidentally, why is this "euro bond" not a "euro bond" as far as the Germans are concerned?). It's Triple-A status means investors likely had to dump some bunds in order to make room. That adds a few more basis points to 10-year yields.

Thirdly, there's €5bn in new 10-year supply hitting the market later this morning.

Finally, there's evidence to suggest the recent (admittedly very tame) advances in equity markets are the result of significant repositioning into defensive, high cash-flow stocks. Exactly the kind of trend that "fast money" funds like to follow in the short term. It's easy to see a scenario where traders flip bunds for defensives in the hope of riding some easy gains, a move which, of course, adds yet a few more basis points to 10-year yields.

In other words, I'm not quite ready to buy the "core contagion" argument just yet: the last time investors bit on this was when French yields backed up in the run-up to its Presidential elections. That didn't work out very well for the shorts.

0805 BST: Cautious open

We're seeing European shares creep into the green in the opening minutes of trading, with the broad FTSE Eurofirst 300 adding around 0.1 percent to trade at 990.98. Britain's FTSE 100 has ticked up by around 0.14 percent as few with the first trades booked and we're seeing a similar advance in Spain's IBEX. Germany's DAX is faring slightly better with a 0.3 percent gain, as is Italy's FTSE MIB.

0750 BST: Good Morning!

Financial bookmakers are calling for a mildly positive start to European equity trading, but it's anyone's guess as to the direction of the day's movements given the unpredictability of reaction we've seen over the past few days.

Asia overnight was a case in point, with the broadest measure of the region's share prices, the MSCI Asia Pacific Index, swinging in and out of positive territory before settling down around 0.6 percent to 112.85.

European trade will likely take its cue from both the Italian debt auction, slated for around 0900 BST and Industrial Production figures from the Eurozone around an hour later. The Italian auction, however, while large (€9.5bn) is for very short-dated paper (24 months and under) and thus very likely to be snapped-up by the nation's banks as opposed to foreign investors. This can often create the impression of a successful, well-bid sale but is actually more of a function of the maturity of the debt and its use as lending collateral. A sterner test will come with tomorrow's three-year auction.

Bond markets are already up and running in Europe with German bund futures extending declines from yesterday to 141.54 while 10-year German bund yields have risen to a one-month high of 1.52 percent. Spanish 10-year bonds are trading marginally better at 6.71 percent while Italy's are quoted at 6.17 percent.