UK amp EU Market Commentary FTSE loses 0 3 on Italian debt concerns as yields hit euro era highs

The FTSE 100 lost 0.3% in a very choppy trading session as investors reacted to another large rise in Italian bond yields, driving up the cost of borrowing further for the indebted nation and raising fears of widening contagion of the sovereign debt crisis.

It has been a very choppy day with investors reacting to the news flow out of Italy and tremors from the bond markets impacting near term sentiment for stocks.

In a strong sign that investor confidence in Italy’s ability to cut their spiralling deficit and meet austerity plans was waning, the yield on 10 year Italian bonds hit a new euro era high today of 6.69%, fast approaching the 7% level to which triggered bailouts for Greece, Portugal and Ireland.

The political instability in the region Is hardly helping matters also and we have seen investors react instantly to any news, rumour or speculation out of the region on Prime Minister Silvio Berlusconi’s position, which appears to be weakening significantly as allies defect to the opposition.

Markets rally on Berlusconi resignation rumour
The FTSE 100 and stocks around Europe started the day weaker by over 1% but in a stark reflection of the markets confidence in Berlusconi’s ability to lead Italy through its debt crisis, stock indices rallied near 1% by mid day from their earlier lows on rumours that Berlusconi was to resign. In a remarkable few hours of trading, the denial of such rumours by the Italian PM on his own Facebook page and early profit taking by investors drove markets back into negative territory in the final hour of trading.

The mere fact that you have equity markets rallying on speculation that the Italian PM was to resign today shows that investors have little confidence in Berlusconi’s ability to address and contain Italy’s debt problems. All eyes now turn to tomorrows vote in Parliament on the 2010 Budget review, where a failure could lead to a vote of confidence. As such, one can expect tomorrows markets to be equally choppy and reactive to speculation out of Italy.

Correlating strongly with the heightened tensions surrounding the sovereign debt situation in Italy, banks were the main faller in European trade and the key drag on the FTSE 100. RBS and Lloyds Banking Group shares both lost 3% on the day closely followed by a 2.2% fall in Barclays shares.

IAG, the airline Group, shares lost 4.5% and was the worst performing stock on the FTSE 100 today.