Formation of Italian government shores up markets

As 2 months of political deadlock end, Italian stocks outperform and borrowing rates slide

Associated Press
Markets steady despite growing ECB rate cut talk
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In this April 24, 2013, photo, Trader Gordon Charlop, center, works on the floor of the New York Stock Exchange. World stock markets mostly rose Monday April 29, 2013 as weaker-than-expected U.S. growth added to expectations that central banks will continue easy monetary policies to support economic recovery. (AP Photo/Richard Drew)

LONDON (AP) -- Italian financial assets were the big winners Monday at the start of an action-packed week in global markets, as investors cheered the news that a new government has been formed after two months of political deadlock.

The formation of the country's new coalition government, led by Premier Enrico Letta from the center-left Democratic Party, brings to an end a period of uncertainty in the country following inconclusive elections in February. The government, which is made up of forces from the center-left and the center-right, faces its first test later during a confidence vote in Parliament.

As the third-biggest economy among the 17 European Union countries that use the euro, Italy is hugely important to the future of the single currency. It has the second-highest debt burden in the eurozone after Greece, so it remains under market pressure to keep a lid on its borrowings. Over the past couple of years, Italy has done a lot to bring its debt down but at a high cost, with the economy back in recession and unemployment on the rise.

"Given the fractious nature of Italian politics, the new government headed by Enrico Letta is indeed progress," said Michael Hewson, senior markets analyst at CMC Markets.

"However it was done without any of the protagonists who had led Italy's main political parties in the original election campaign, which could bring into question the democratic legitimacy of the entire process with technocrats in a number of key positions," he added.

Despite those worries, Italy's FTSE MIB index outperformed all its peers. It rose 2.2 percent to close at 16,929.68. In another sign of optimism, the yield on the country's benchmark 10-year bond dropped around 0.15 percentage points to 3.87 percent. That's the first time it has dropped below 4 percent since November, 2010.

The euro was also solid, trading 0.4 percent higher at $1.3086.

Elsewhere in Europe, the FTSE 100 index of leading British shares rose 0.5 percent to close at 6,458.02 while Germany's DAX rose 0.8 percent to 7,873.50. The CAC-40 in France ended 1.5 percent higher at 3,868.69.

In the U.S., the Dow Jones industrial average was up 0.6 percent at 14,804.32 while the broader S&P 500 index rose 0.8 percent to 1,594.03. Wall Street was buoyed by some solid U.S. consumption and housing data at the start of a week where investors will have a huge amount to ponder.

Before an expected interest rate reduction from the European Central Bank on Thursday, the Federal Reserve will hold a two-day policy meeting that culminates on Wednesday. And on Friday, nonfarm payrolls data for April will be published, probably the biggest event of the week for investors.

Markets have held up fairly well over the past few weeks despite a run of disappointing economic data, particularly out of Europe and the U.S. Investors have concluded that the "soft patch" is likely to mean that the world's major central banks will remain in crisis mode and maintain their easy and cheap monetary policies for a while longer yet.

"As recent economic numbers have painted a fairly moribund picture of the global economy, investors will be predicting a dovish tone from policy makers," said Mike McCudden, head of derivatives at Interactive Investor.

Earlier in Asia, Australia's S&P/ASX 200 gained 0.6 percent to 5,125.80 and Hong Kong's Hang Seng edged up 0.3 percent to 22,580.77. South Korea's Kospi lost 0.2 percent to 1,940.70. Markets in mainland China and Japan were closed for holidays.

Oil prices tracked equities higher, with the benchmark New York rate up 99 cents at $93.99 a barrel.

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