ITALY’S PLEDGE to fast track economic reform came too late in the day to reverse losses in European markets, but helped Wall Street reverse earlier losses. The Dow Jones index of leading US shares closed up 60 points at 11444.61, but off the highs hit in the wake of positive US jobs figures.
But Italian bond yields – a measure of borrowing costs – surpassed those of Spain yesterday for the first time in 15 months, and the risk of a US ratings downgrade remained.
European Markets opened sharply down on continmued fears over the European debt crisis and faltering US recovery. But better than expected employment data from the US showing payrolls rose by 117,000 workers, helped them reverse some of their losses. But the rally had dissipated by mid-afternoon, bringing to a close the worst week in three years, with some $2.5 trillion wiped off markets.
Speculation that the European Central Bank will move to buy Italian and Spanish bonds in thwe wake of the Italian announcement give Wall St an additional boost.
As European leaders continue to discuss potential solutions to the crisis, the European Union’s economic and monetary affairs commissioner Olli Rehn tried to calm markets in a speech where he described the recent sovereign debt tensions as being “not justified by economic and budgetary fundamentals”.
The Irish market slightly out-performed its European peers, but still lost 1.5 per cent. In London, the FTSE 100 gave up 2.7 per cent, dragged down by Royal Bank of Scotland which led a retreat of banking stocks to finish 6.9 per cent down at 28.18p.
It reported a pre-tax loss of £1.4 billion in the second quarter, due in part to the poor performance of its Ulster Bank division.
In Frankfurt, the DAX retreated by 2.8 per cent, while in Paris, the CAC-40 dropped back by 1.3 per cent. The MSCI’s All-Country World Index was also down on the day, having fallen back by 1.1 per cent.
In terms of the cost of financing, Ireland has started to move in the opposite direction to its fellow peripheral countries, with reports that the ECB had again purchased Irish and Portuguese bonds.
The yields of 10-year Irish bonds declined by 37 basis points to a low of 10.02 per cent. However, markets remained disappointed that there was no ECB focus on Italy and Spain.
“Would the ECB please get serious?” Berenberg private bank said in a note, adding “we need a circuit breaker to stop the vicious circle in which fear feeds on fear”.
Italy suffered with the focus of the bond markets firmly on its position. Long-term cost of financing Italian debt rose above that of Spain for the first time since May 2010, and the yields of 10-year Italian bonds reached a new high of 6.14, while Spanish 10-year bonds slipped to 6.03.
It is now seen as likely that, in return for making further reforms such as speeding up state asset sales, the ECB will step in to purchase Italian bonds.
Responding to this possibility, Italian prime minister Silvio Berlusconi announced that Italy would speed up its austerity measures in an effort to calm market turmoil.
In Turkey, the ISE National 100 Index continued to fall. It tumbled 6 per cent, the lowest level since July 2010.
Despite the efforts of the Swiss central bank to weaken its currency, the Swiss franc was on the edge of near record highs against the euro and dollar. The franc is considered as a safe haven currency. The euro rose as high as $1.42470 against the dollar.
Japanese finance minister Yoshihiko Noda said he was closely watching yen movements, signalling a readiness to continue selling the currency. In the US, the SP 500 had advanced by 0.5 per cent by lunch-time, having slumped by 2.7 per cent earlier in the day, amid concerns that the US economy was slipping into recession. Expectations are now growing for an additional third round of quantitative easing in the US in the form of “QE3”. Ten-year treasury yields rose by 16 basis points to 2.57 per cent.
