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Markets react positively to Italy's leadership change

Text by News Wires

Latest update : 2011-11-14

European investors were cautiously optimistic at the start of Monday's trading following the appointment of economist and former European Commission minister Mario Monti as the head of Italy's government at the weekend.

REUTERS - European shares trimmed losses in choppy trade on Monday, with investors expressing relief that decent demand for a crucial Italian bond auction underpinned hopes that the country’s new leader would be successful in implementing radical reforms.

The sale of 3 billion euros of five-year government bonds was seen as the first test for former European Commissioner Mario Monti, who was invited on Sunday by Italy’s president to form a government.

At an auction last week, the government’s borrowing costs surged to levels well beyond what the country could afford over the long term.

At 1033 GMT, the FTSEurofirst 300 index of top European shares was down 0.2 percent at 982.29 points after falling to a low of 979.85 earlier in the session. Italy’s FTSE MIB index rose 0.7 percent.

“We have seen some strong gains in the past session. Although there is some progress in both Italy and Greece, there are still a lot of concerns, prompting investors to cash in on early gains,” said Joshua Raymond, chief market strategist at City Index.

Investors kept a close eye on political developments in highly-indebted Italy and Greece. New Greek Prime Minister Lucas Papademos, a former central banker who oversaw his country’s entry to the euro zone in 2002, will face a confidence vote in his cabinet on Wednesday.

“We have now got two strong characters who are prepared to put public interest ahead of personal interest and they have a lot of goodwill to start with. The challenge for them now is to implement the fiscal austerity and budget reforms,” said Mike Lenhoff, chief strategist at Brewin Dolphin.

“The important thing for them is to attempt to re-establish credibility as quickly as possible.”

Banks, many of which are highly exposed to Italy and Greece and have suffered through the euro zone debt crisis this summer, were flat after gaining in early trade.

Analysts said that a sense of urgency among policymakers had increased. Although they would face political roadblocks, in the end the reform agenda will go in the direction needed.

“The only question is whether these reforms can be pushed through politically. The biggest risk is that politicians would start to position themselves for the next election,” said an analyst at a European fund that manages more than $450 billion.

Technical picture

The euro zone’s blue chip Euro STOXX 50 fell 0.5 percent to 2,314.09 points. Analysts, however, said that considering the recent tensions in the euro zone, the index has been remarkably resilient.

Bill McNamara, technical analyst at Charles Stanley, said that after establishing a floor at around 2,226, it appeared the index could have scope for further upside in the near term.

The recent trading range had been exhibiting resistance at 2,370 and a test of that level looked like a realistic expectation, he said, adding that if the level was exceeded, then the index could run back up to last month’s highs in the vicinity of 2,500.

Stocks, traditionally seen as defensives, underperformed the wider market, with the food and beverages index down 0.9 percent and healthcare down 0.2 percent.

“The defensive valuation attraction readily apparent in the Spring of 2011 has been eroded somewhat, and we suggest that there are better valuation opportunities and growth potential in some areas of the cyclicals which has non-European exposure,” said Gerard Lane, analyst at Shore Capital.

Date created : 2011-11-14


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