Italian yields surge as wider contagion threatens

After holding up relatively well in recent day, stock markets finally succumbed to the worries over European debt on Wednesday. The S&P 500 plunged 3.7 percent, its worst drop in almost three months. The STOXX Europe 600 fell 1.7 percent.

The trigger for the declines was a surge in Italian bond yields. The 10-year yield rose 48 basis points to 7.25 percent and the two-year yield surged 82 basis points to 7.20 percent.

The situation looks dire, according to some analysts quoted by Bloomberg.

“The contagion effect is no longer a risk, it’s a fact in Europe,” Stephen Wood, who helps oversee about $163 billion as the New York-based chief market strategist for Russell Investments, said in a telephone interview...

Italy may be “beyond the point of no return” in becoming the next victim of Europe’s debt crisis even if the government implements austerity measures to reduce debt, Barclays Capital analysts say.

Still, Marc Chandler thinks that Italy actually has enough resources to pay its debt and that the problem is “primarily one of confidence not solvency”. Nevertheless, a “policy response must be forthcoming in short order or the contagion will overwhelm everything else”.

As it is French and Spanish bond yield spreads versus Germany joined their Italian counterparts in hitting record levels on Wednesday.

The debt crisis may already be hurting confidence in the real economy in France. The Bank of France's sentiment indicator for industrial activity fell to 96 in October from 97 in September while its index for the services sector fell to 95 from 96.

Meanwhile, outside Europe, there were mixed data on sentiment in Japan on Wednesday. The Cabinet Office's economy watchers survey showed that the sentiment index for current conditions rose to 45.9 in October from 45.3 in September. The index for future conditions, however, fell to 45.9 from 46.4.

Other reports on Wednesday showed that China's economy may already be slowing. Industrial production rose by 13.2 percent from a year earlier in October, its slowest rate of increase in a year. Inflation moderated to 5.5 percent in October from 6.1 percent in September.