Italy's Various Votes Causing Volatility. Stocks and Bonds Diverge

This morning's live alert from MBS Live! by way of background to more recent events this AM.

MBS Turn Green After Opening Slightly Weaker. TSYs Still Lagging 9:21AM

It was a fairly quiet overnight session with headlines focused primarily on an impending budget vote in Italy (and possible Berlusconi ousting?) and the ongoing sorting-out process of Greece's new Prime Minister. Best we can tell, the shuffling of ruling parties in Greece DOES NOT look like it will preclude them from receiving their sixth tranche of bailout money (needed by year-end to avoid default) as long as whoever takes the reigns facilitates a vote to approve bailout terms. The fact that possibility exists and bond markets continue to trade near a 2% 10yr yield is a positive sign--one which might hint at the possibility that some sort of bond market bounce was in the cards before Papandreou threw his cards on the table. 

The overnight trading action--light in volume--saw Treasuries and MBS walk in the door slightly weaker though the latter have rallied enough to turn green on the day with Fannie 3.5's up 1 tick at 102-03. 10yr yields are 2bps higher at 2.042. 

There are no major economic reports this morning, but a 3yr Treasury Note Auction at 1pm. The combination of the auction and ongoing headlines out of Europe stand the best chances of ruling the roost among market-movers today. 

Short term technical support just over 2.06 in 10's, and then the 2.12 zone. Fannie 3.5's short term at 101-31 with pivots at 102-06 and resistance at 102-12/13. Big support at 101-25/26.

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Since the fairly uneventful open, some headlines out of Italy and Greece have been shaking things up to a small extent.  Here's how the 2 day price movements in MBS look, suggesting the following technical milestones:

Similarly, 2 day yield levels in 10's suggest some potential support just over 2.05

Stocks continue to trade within their recent trend channel:

They had also been diverging from bond yields, threatening a breakout on the top side of the trend channel until a few headlines began to hit out of Greece and Italy:

(11/8/11 10:16AM): RTRS - ECB's WEIDMANN - GREECE FINANCIAL AID WILL BE HALTED IF IT DOES NOT FULFILL AID CONDITIONS

(11/8/11 10:15AM): RTRS- ITALY OPPOSITION LEADER SAYS ITALY RUNS REAL RISK OF LOSING ACCESS TO FINANCIAL MARKETS IN COMING DAYS

(11/8/11 10:14AM): RTRS- ITALY OPPOSITION LEADER SAYS VOTE SHOWS BERLUSCONI GOVT NO LONGER HAS MAJORITY

(11/8/11 10:13AM): RTRS- ITALY'S BERLUSCONI WINS BUDGET VOTE AFTER OPPOSITION ABSTAINS BUT RESULT INDICATES HAS LOST MAJORITY

(11/8/11 10:12AM): RTRS - ITALY'S BERLUSCONI WINS BUDGET VOTE AFTER OPPOSITION ABSTAINS WITH 308 VOTES IN 630 SEAT PARLIAMENT

(11/8/11 10:11AM): RTRS - ITALIAN LOWER HOUSE SPEAKER OPENS VOTE KEY TO BERLUSCONI'S FUTURE

(11/8/11 10:08AM): RTRS - GREEK NEGOTIATIONS OVER PAPADEMOS AS NEW PM BEING CONCLUDED, DETAILS REMAIN TO BE FINALISED- SOCIALIST PARTY SOURCE

That resulted in the following before/after for stocks/bonds:

So, as we can see, still a bit of indecision as to whether or not stocks are willing to commit to more pronounced selling and whether or not bond yields will want to dip under 2% on an auction day.  In the time it's taken to type this and upload videos/charts, the 102-06 pivot in MBS has proved to be resistant to gains and 10yr yields are at the same levels as seen in the chart above.  Perhaps we're waiting on the 3yr auction at 1pm for more guidance, or at least some more convicted opinions to let us know how we should all be feeling about what's going on in the EU.

Thoughts, questions, comments?  Feel free to let me know in the comments section below.