That sucking sound everyone is hearing this morning is the steam being taken out of the market by the spike in Italian bond yields, which are above 7.00% across the curve from one to 30 years.

The yield on Italy's benchmark 10-year note is currently 7.30%, but it nearly reached 7.40% earlier in the wake of an announcement from LCH.Clearnet that it is raising its initial margin requirement across all maturities of Italian debt by 3.5-5.0%. 

That move will effectively make it more costly to buy Italian bonds and to use them as collateral, lessening their appeal at a time when doubt remains high that Italy will implement the necessary reforms to put its economy on a faster growth track.

Seven is considered by many to be a lucky number, but not in this instance as participants are cognizant that bond yields pushing above 7.00% eventually forced Greece, Ireland, and Portugal into bailout situations. 

The key concern at this juncture is that Italy is too big to help in the same fashion, barring some type of massive central bank intervention.

The S&P futures are down 28 points and are trading 2.2% below fair value, which means it is going to be a decidedly lower open for the cash market.

The current indication is a stark reversal from yesterday when the market rallied reportedly on the news that Italian prime minister Silvio Berlusconi said he would resign after Italy passed its budget reform measures.  That reaction was peculiar to us in that previous rumors of his impending resignation had done nothing to bring down bond yields, which continued to rise even after the leveraged EFSF plan was announced on October 26.

In turn, Berlusconi's resignation simply adds to the sense of political uncertainty that is permeating Italy as questions arise as to whether new elections will be held and how committed a new government -- whether it is temporary or permanent -- will be to implementing unpopular austerity measures.

It was that thinking that led us to conclude in yesterday's Page One that any celebratory response to imminent leadership change in Greece and Italy should probably be held in check.  By the way, the new prime minster Greece was supposed to announce yesterday still remains nameless.

Our language translator indicates the Italian word for "mess" is confusione.  It doesn't take much to see the English derivative there.  The goings-on in the eurozone are the picture of confusion and are an ongoing source of volatility for the capital markets.

Not surprisingly, the risk-off trade is back on this morning.  The U.S. Dollar Index is up 1.2%; the 10-year Treasury Note is up nearly a point, driving its yield down to 1.98%; and commodities are sliding.

China reported some pleasing inflation data last night that helped boost Asian markets, yet they closed before the bond confusione in Italy. 

Separately, General Motors (GM) beat the third quarter Capital IQ consensus earnings estimate by eight cents, but added that deteriorating economic conditions will likely prevent it from reaching its 2011 target of break even on an EBIT-adjusted basis before restructuring charges in Europe. 

Shares of GM are indicated 7% lower in premarket trading, which isn't helping things this morning.  Still, the main focus is on Italy and trying to figure out what comes next.

--Patrick J. O'Hare, Briefing.com

Patrick J. O'Hare is Chief Market Analyst for Briefing Research, Briefing.com's institutional research service.  To request a free trial, please email researchsales@briefing.com.