- Italian presidential vote still inconclusive -- third round of voting begins today.
- Growth worries persist as soft data and downbeat earnings weigh on sentiment.
Markets Overnight
Italian Presidential Vote Still InconclusiveHopes of breaking the deadlock in Italian politics were dealt a blow yesterday, as the first two rounds of voting failed to elect a new president. Shortly before the election, Mr. Bersani (leader of the Democratic party) had struck a deal with the centre-right coalition led by Berlusconi to back Franco Marini as candidate. However, in the first round of elections, several democrats voted against him, and he failed to secure the two-third majority required to be elected. As a by-product, this created further divisions within the Democratic party and raised doubts over Bersani’s continued leadership. The second round of elections also failed to yield a result and voting continues today (see ‘Focus today’ and Financial Times for further information).
Growth Worries Persist
The latest round of U.S. economic data released yesterday was unable to ease concerns that a soft spot is materialising. Initial jobless claims rose slightly, while the Philly Fed survey and leading indicators dropped. Overall, however, the readings were not too surprising, mirroring the softness seen lately in other indicators. That said, although the decline in commodity prices and robust fundamentals should imply that the US slowdown is only temporary, the data add to worries in a week where markets have also received downbeat data from Germany (ZEW) and China (Q1 GDP).
Stock Markets Stay Volatile As Risk Appetite Retreats Again
Volatility has dominated this week as earnings reports and economic data have set the direction on stock markets interchangeably. This is mirrored in the VIX index, representing the expected volatility of the S&P500 index, spiking 6pp over the week. Yesterday, risk aversion gained the upper hand, as soft U.S. data coupled with downbeat results from Morgan Stanley set the course.
U.S. Treasuries Gain, Well-Received EU Bond Auctions
U.S. Treasuries extended their gains, with small decline in yields in the 10yr segment, being underpinned by relatively soft comments from Fed’s Kocherlakota and Lacker. In Europe, Ireland and Spain tightened versus Germany despite the fragile overall market sentiment, on the back of strong auctions. In Ireland, the NTMA issued three-month bonds in its fourth show of market access this year (see Irish Times) and Spain beat the upper target in yesterday’s issuance of 10-year maturities (see Bloomberg). France was also able to secure record-low funding, possibly supported by anticipation of Japanese buying flows (see Wall Street Journal). The market reaction to the Italian presidential vote was limited, as Italy widened some 9bp in the 10-year segment during the afternoon.
Yen Trades Lower
Despite soft sentiment, the yen extended its decline versus both EUR and USD yesterday, as comments from the G20 meeting in Washington suggest that members will withhold direct criticism of Japan’s aggressive monetary easing.
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