IG Markets Afternoon thoughts

IG Markets Afternoon thoughts

Across Asia, regional markets are mostly higher after picking up a strong lead from US markets. Eurozone debt anxiety remains rampant after Italian yields spiked to a 14-year high of 6.67%. With the future of Italian Prime Minister Berlusconi in doubt, it seems markets are increasingly optimistic that a change of guard will result in Italy being better run. Investors want to see a leader who can implement the suggested reform programme. The Nikkei is down 0.2%, with the exporters leading the declines. The Shanghai is 0.3% higher, while the Hang Seng is the best performer in the region with a 0.8% gain.

Australia's S&P/ASX 200 index is up 0.4% at 4290, after hitting a one-week high of 4301.5, following a 0.6% rise in the S&P 500 on expectations that Italian Prime Minister Silvio Berlusconi could resign The local gains have come despite news that Australia’s trade surplus narrowed in September after export prices slipped. BHP Billiton is up 0.4%, Rio Tinto is 1.3% higher and the major banks are stronger between 0.8% and 2%. Westfield is up 0.8% after reaffirming its earnings guidance.

The market has maintained a tight trading range today, highlighting how cautious investors are. Italy and Greece are both firmly in focus, as both nations look towards a change in leadership to help them get out of the mess they are currently in. Overnight, EU commissioner Mr Rehn made it clear that Greece had now done enough to receive the sixth tranche of aid of the first bailout which is positive; however, the market is firmly focused on Italy now and its ever higher yields. Italian ten-year yields blew out another 34 basis points versus German bunds, and pushed up to 6.67%. Everyone wants to see Mr Berlusconi step down from power, and until he does, fixed income traders will continue to sell ten-year bonds which will leave yields at elevated levels.

A sense that Mr Berlusconi could be replaced would see Italian yields attract significant buyers, effectively causing a strong risk on rally. However, he has dodged many bullets in the past and it won’t be too surprising if he somehow survives yet again. It’s likely that the Italian Prime Minister will try to rally his troops before a potential confidence vote. Investors will also be looking out for announcements regarding Greece’s leadership. With all this uncertainty persisting, we are likely to see gold continue to be in focus after last night’s gains.

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