LONDON (Nov 7): The euro and world stocks fell on Monday as political uncertainty in Italy fuelled concern the euro zone debt crisis could engulf the bloc's third biggest economy, prompting investors to cut exposure to riskier assets.
Investor focus shifted to Italy, where Prime Minister Berlusconi is facing rebellion from his party, overshadowing a government coalition deal in Greece to help secure its latest bailout package and avoid a near-term default.
Although equities trimmed losses on market talk that Berlusconi could resign soon, investors were on edge before a key parliamentary vote on budget reforms on Tuesday that is turning into a test of his leadership.
"The focus is Italy; Italy's clearly the big one. Everyone expected what has come out of Greece," Christopher Potts, strategist at Cheuvreux, said.
"The whole problem is the (Italian) opposition and its disarray. Who takes over and how will it be organised? No-one has the answer but it's of huge importance," he added.
U.S. shares were poised to open lower, with futures for the S&P 500 0.5 percent down, and those for the Nasdaq slipping 0.4 percent.
The FTSEurofirst was last 0.4 percent down after a 3.8 percent decline last week which ended a five-week rally. The MSCI world equity index was last 0.2 percent lower as emerging stocks slipped 0.4 percent.
CRUNCH TIME FOR BERLUSCONI
With Italy's debt levels stuck at 120 percent of GDP, the country's problems pose a much bigger potential risk to financial markets than those of Greece.
Italy's borrowing costs have been rising sharply over the past several weeks, with the Italian 10-year government bond yield rising more than 100 basis points since late September.
Italian 10-year government bond yields hit 14-year highs of around 6.67 percent on Monday, before easing slightly to 6.54 percent. Traders cited European Central Bank buying of the debt in the secondary market and the reports about Berlusconi stepping down.
Borrowing costs of 7 percent and above are widely viewed as unsustainable.
Although the Italian 10-year yield premium over German benchmarks was off intraday highs above 480 bps, it was still at its highest since 1995. The cost of insuring the country's debt against default also rose.
The political ructions in Italy supported demand for safe-haven government bonds, pushing German Bund and U.S. T-note yields lower.
Fears that Italy was getting sucked into the debt crisis pushed the euro lower against the dollar. It was last 0.5 percent down at $1.3761 , having risen as high as $1.3839 in the Asian session.
"The euro is under pressure as Italian spreads are up and that is a real risk factor," said Jeremy Stretch head of currency strategy at CIBC World Markets. "Italy is too big to be safe and markets are fearful that political uncertainty will claim its second victim in Italy."
Political wrangling in Greece had sparked panic in global financial markets on fears that it would fail to save the country from defaulting and to stop the region's two-year debt problems from spreading to other countries in the euro zone.
While it has managed to cobble together a new government to help get its aid package, market jitters remain over a lack of funding to beef up the euro zone's bailout fund after EU leaders failed to get any concrete pledge for new money at a G20 summit on Friday.
Gold prices gained about 1 percent as the European debt worries triggered safe-haven interest in bullion. Spot gold was last up 0.8 percent at $1,770.11, near its highest since Sept. 22.
Brent crude rose more than $1 above $113 as hopes of oil demand growth overshadowed concerns about the euro zone debt crisis. U.S. crude futures were up 0.5 percent at $94.69 a barrel. - Reuters
Investor focus shifted to Italy, where Prime Minister Berlusconi is facing rebellion from his party, overshadowing a government coalition deal in Greece to help secure its latest bailout package and avoid a near-term default.
Although equities trimmed losses on market talk that Berlusconi could resign soon, investors were on edge before a key parliamentary vote on budget reforms on Tuesday that is turning into a test of his leadership.
"The focus is Italy; Italy's clearly the big one. Everyone expected what has come out of Greece," Christopher Potts, strategist at Cheuvreux, said.
"The whole problem is the (Italian) opposition and its disarray. Who takes over and how will it be organised? No-one has the answer but it's of huge importance," he added.
U.S. shares were poised to open lower, with futures for the S&P 500 0.5 percent down, and those for the Nasdaq slipping 0.4 percent.
The FTSEurofirst was last 0.4 percent down after a 3.8 percent decline last week which ended a five-week rally. The MSCI world equity index was last 0.2 percent lower as emerging stocks slipped 0.4 percent.
CRUNCH TIME FOR BERLUSCONI
With Italy's debt levels stuck at 120 percent of GDP, the country's problems pose a much bigger potential risk to financial markets than those of Greece.
Italy's borrowing costs have been rising sharply over the past several weeks, with the Italian 10-year government bond yield rising more than 100 basis points since late September.
Italian 10-year government bond yields hit 14-year highs of around 6.67 percent on Monday, before easing slightly to 6.54 percent. Traders cited European Central Bank buying of the debt in the secondary market and the reports about Berlusconi stepping down.
Borrowing costs of 7 percent and above are widely viewed as unsustainable.
Although the Italian 10-year yield premium over German benchmarks was off intraday highs above 480 bps, it was still at its highest since 1995. The cost of insuring the country's debt against default also rose.
The political ructions in Italy supported demand for safe-haven government bonds, pushing German Bund and U.S. T-note yields lower.
Fears that Italy was getting sucked into the debt crisis pushed the euro lower against the dollar. It was last 0.5 percent down at $1.3761 , having risen as high as $1.3839 in the Asian session.
"The euro is under pressure as Italian spreads are up and that is a real risk factor," said Jeremy Stretch head of currency strategy at CIBC World Markets. "Italy is too big to be safe and markets are fearful that political uncertainty will claim its second victim in Italy."
Political wrangling in Greece had sparked panic in global financial markets on fears that it would fail to save the country from defaulting and to stop the region's two-year debt problems from spreading to other countries in the euro zone.
While it has managed to cobble together a new government to help get its aid package, market jitters remain over a lack of funding to beef up the euro zone's bailout fund after EU leaders failed to get any concrete pledge for new money at a G20 summit on Friday.
Gold prices gained about 1 percent as the European debt worries triggered safe-haven interest in bullion. Spot gold was last up 0.8 percent at $1,770.11, near its highest since Sept. 22.
Brent crude rose more than $1 above $113 as hopes of oil demand growth overshadowed concerns about the euro zone debt crisis. U.S. crude futures were up 0.5 percent at $94.69 a barrel. - Reuters
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