Italy concerns drag European stocks lower

<p>European stocks were dragged lower in trading on Monday as investors switched their focus from Greece to Italy as sovereign debt contagion fears ramble on. […]</p>

European stocks were dragged lower in trading on Monday as investors switched their focus from Greece to Italy as sovereign debt contagion fears ramble on. The FTSE 100, DAX and CAC all lost around 1.5% in trading as a result, with Indices weighed down by weakness in the heavyweight mining, banking and oil stock sectors.

Italy is the real concern

Movements in bond markets continues to send ripples into equity markets today, with the yield on 10yr Italian bonds hitting new record highs of 6.67%, and getting ever closer to the 7% mark which triggered bailouts for Greece, Portugal and Ireland.

With European leaders no closer to determining how their Euro zone bailout fund is to increase in size, there remains significant concerns that Europe may not have the firepower in place should yields continue their upward momentum and push beyond the 7% level.

However, with Euro zone financial officials set to meet in Brussels later today to determine how to increase the size of the European Financial Stability Facility (EFSF) up to four or five times its existing and largely impotent €440bn, investors will likely keep a close eye on developments here. That said, no announcements are expected today from the meeting and it remains to be seen how they will source additional funding given China’s initial rejection and Angela Merkel’s failure to drum up support of capital injections into the IMF at the G20 last week.

Make no mistake, the inclusion of Italy, who has the third largest economy in the Euro zone, into the sovereign debt nightmare has the potential to blow the crisis far beyond its existing boundaries and this is where the real concerns lay.

This could prove to be a pivotal week for Italy and the sovereign debt crisis. A failure to pass through the vote on the 2010 Budget Review tomorrow could lead to a confidence vote in the Italian parliament, the result to which is darkly clouded after yet more allies defected to the opposition, weakening Berlusconi’s majority further and bringing Italy closer to a political earthquake at the very time where the markets need to see political and fiscal solidarity in the country.

So once again, it seems financial markets and investors will pin their hopes on yet more political bargaining and a vote in parliament.

Greece concerns recede on government of unity

At least it seems that for now, the fragility in the by the political instability in Athens has diminished, with the likely resignation of Greek PM George Papandreou and the creation of a Government of Unity with the opposition party. Whilst details remain sketchy as to how this will come about, investors seem to have out last week’s Greece concerns to the back of their minds now with attention switching to similar political instability in Italy.

In London trade, most stocks in the FTSE 100 fell with investors starting the week on the back foot. Weir Group was the heaviest faller with its shares losing near 8% after the engineering firm’s interim statement convinced many investors to lock in their gains after a strong run that has seen the firms share price rally 45% from the start of October up until last week’s close.

Premier Foods shares jump but caution needed

Shares of Premier Foods however saw a big jump today, rallying 16% after the firm received a deferral from its financial covenant test and said that it was in constructive talks with its banks regarding securing longer term financing. However, whilst a 16% jump in share prices may otherwise have been seen as a huge confidence boost from shareholders, with Premier Foods share prices remaining incredibly volatile of late, and some 89% off May’s highs, we should take today’s jump with a pinch of salt.

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