In US trading, the stock market initially followed the lead from Europe and gradually fell to lower and lower levels. Then a late day rally intervened and the market found itself 'rescued' by the close, actually closing in positive territory. We tried to find out whether the turnaround could be tied to some specific trigger event and were rewarded with another example of what we would term 'inadvertent financial market humor'.
Apparently the 'trigger' was provided by an announcement by Chinese authorities that they were planning to redeploy part of China's vast hoard of foreign exchange reserves into Italian government bonds of all things. As we mentioned above, Italy is in dire need of buyers for its bonds in coming weeks. China wants to once again play the 'white knight'. As the WSJ reported during the trading session:
“News reports that Italy is in talks with China to buy some Italian sovereign debt have completely turned around the stock market. The Dow has regained about 100 points in a very short period of time and is now down only about 50.”
[…]
The Italian government is making approaches to China with the aim of selling the cash-rich Asian country “significant” quantities of Italian bonds and investments in strategic companies, FT reports.
* China Investment Corp. Chairman Lou Jiwei was in Rome last week for discussions with Italian Finance Minister GiulioTremonti and Italy’s Cassa Depositi e Prestiti, a government entity that has established an Italian Strategic Fund open to foreign investors, FT says, citing unidentified Italian officials
* Italian officials met China Investment Corp. and the country’s State Administration of Foreign Exchange, which manages most of China’s $3,200 trillion foreign exchange reserves, in Beijing two weeks ago, FT says
* Italy’s Head of Treasury, Vittorio Grilli, met Chinese investors in the Chinese capital in August, FT reports
* Further negotiations are likely to take place soon, FT says, citing unidentified Italian officials.
Don't you just love it when 'unidentified government officials' are launching such a rumor one day before a major Italian bond auction? Alas, let's assume that China really loves throwing good money after bad and that it is actually true.
Is this a good reason to bid up stocks?
Not really, if we think back to China's Wen Jiabao offering to buy Greek debt in early October of 2010 (in fact, that was just about the worst timing imaginable – the two year government note that today yields nearly 70% at the time yielded less than 8% – it was the post summer 2010 low point in Greek bond yields; hat tip to Seeking Alpha's current news editor for digging up the link to the story).
“Premier Wen Jiabao made the offer at the start of a two-day visit to Greece, his first stop on a tour of Europe, and also said he wanted to boost shipping and trade ties with Athens, underscoring Beijing's use of economic strength to win friends.
"With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue," Wen said, speaking through an interpreter.
"China will undertake a great effort to support euro zone countries and Greece to overcome the crisis."
Well, that one evidently didn't quite work out as planned, in spite of the 'great effort'. We wonder if China has already tendered its Greek bonds into the 'voluntary' debt exchange?
By the way, readers may recall that China allegedly also was an avid bidder in the Portuguese government bond market back when Portugal was 'not Greece', or rather, was 'not yet Greece'. It didn't take very long from the time China initiated this buying spree to Portugal's government becoming insolvent. It seems Chinese buying of European government bonds is rather an ill omen, all things considered.
