Italy’s recent elections failed to identify a clear winner. This has injected uncertainty back into the Eurozone, just as things seemed to be settling out.
Italian bonds are coming back into the spotlight as yields soar in response. A new 10-year bond will be auctioned on February 26 and investors should watch the 2-year bond as a barometer for new concern in the financial markets.
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If Italian bond yields approach those on Spanish bonds, concerns about credit rating downgrades could resurface.
On the currency front, the euro-Swiss franc ratio will be the telltale indicator. If the euro rises to 1.20 CHF, the Swiss National Bank will once again have to interfere.
Another key measure will be the spread between Italian and Spanish corporate bond yields.
Lastly, keep an eye on the spread between US Treasuries and German Bunds.
New lows are still far away but they would be a signal the crisis is on its way back
and the second go-round would be worse than the first.
Whether the US economic recovery is strong enough to battle renewed crisis as well as the sequester is a tough question to answer.