Relief rally short lived as Italian bond yields race higher; Chinese inflation eases

<p>Stocks across Europe lost ground on Wednesday, reversing earlier Silvio Berlusconi resignation induced gains, as stock markets reacted to exacerbating moves in bond markets where […]</p>

Stocks across Europe lost ground on Wednesday, reversing earlier Silvio Berlusconi resignation induced gains, as stock markets reacted to exacerbating moves in bond markets where Italian 10-year bond yields hit the crucial 7% level which dictated bailouts for Greece, Portugal and Ireland.

With European stocks markets closed when the announcement was made, we saw the first investor reactions in this morning’s trade, which was broadly positive but with Mr Berlusconi today hinting that elections could be called as late as next February, the initial relief in stock markets has been short lived and the crisis has seemingly been deepened by Mr Berlusconi’s unwillingness to make a sharp exit.

The key point here is whether investors are confident enough in PM Berlusconi to implement the much needed economic reforms efficiently before he leaves office. The answer seen today is a firm no and there is deep concern that the crisis in Italy is in fact deteriorating. The problem is that whilst Europe could bailout Greece, Ireland and Portugal when their benchmark bond yields hit the 7% level, where can Italy get support from when the European bailout fund lacks the size to make any real impact here? The sovereign debt crisis is intensifying as a result of the seemingly lack of options on the table.

The mere fact that Italian 10-year bond yields have hit the all important 7% level shows that the crisis will not end simply with Mr Berlusconi’s excruciatingly slow demise. The FTSE 100 saw gains of 0.25% by 9am (UK time) whilst the CAC and DAX saw stronger gains of 0.4% and 0.9% respectively. However, a sharp reversal in stock indices was seen as Italian yields rose, forcing the FTSE 100, DAX and CAC lower by 1% a mere 30 minutes later.

Data out of China early today did however help to increase demand for mining stocks after Chinese inflation receded from 6.1% to 5.5% last month, easing concerns over hawkish Chinese monetary policy and helping to raise optimism that the Chinese authorities will change tact and look to install pro-growth policies, potentially increasing metal demand as a result. Shares in Xstrata were the top gainer as a result, rallying 1% on the day closely followed by Vedanta Resources and Rio Tinto.

Company earnings are also under the spotlight today, with Sainsbury’s, HSBC and SuperGroup reporting somewhat of a mixed bag of results and trading updates. Sainsbury’s shares fell 0.5%, tracking the weaker FTSE having broadly met expectations with a 6.6% rise in half-year profits before tax. The supermarket chain also lifted interim dividends by 4.5% and said it was confident going into the Christmas period.

SuperGroup shares continued to recover after the fashion retailer saw a rise on total group sales of 42% despite the supply problems caused by a new warehouse system. Shares have rallied over 30% in this week alone, having slumped to a 16-month low earlier this month. Investors did start to lock in some gains however as the FTSE 100 started to fall by mid morning and this pushed shares back to flat territory.

HSBC shares were a key drag on the FTSE 100, losing 4.7% after the global bank reported a larger than expected drop in third quarter earnings. Underlying profit-before-tax came in at $3 billion last quarter, a fall of 36% as investment banking revenue fell and bad debts in the US rose. The bank admitted that trading conditions had been very difficult.

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