Tokyo - European shares looked set to follow Asian equities
higher on Wednesday and the euro steadied after Italian Prime Minister Silvio
Berlusconi said he would resign, raising hopes the debt-ridden country would
proceed with reforms that may keep Europe’s debt debt crisis from spreading.
An easing in Chinese inflation also soothed fears about the
world's second-largest economy, bolstering oil and copper prices and
underpinning Hong Kong shares.
However, doubts that the European Union will be able to stop
the sovereign debt crisis from spreading continued to fuel interest in
safe-haven gold, pushing prices higher.
European shares were expected to rise, with financial
spreadbetters expecting Britain's FTSE 100 index to open up 1.2%, Germany’s DAX
to rise 1.7% and France’s CAC-40 to gain about 1.1%.
MSCI’s broadest index of Asia Pacific shares outside Japan
rose as much as 1.7% before trimming gains to around 1%, while Japan’s Nikkei
stock average closed up 1.2%.
Berlusconi said on Tuesday he would leave office after
parliament approves a budget law that includes reforms demanded by Europe, but
Italy looks set for prolonged political uncertainty after his announcement.
"The news helped stabilise the euro and prompted investors
to buy back shares, but there is still uncertainty in the euro as reshuffling
its leader alone doesn't guarantee Italy's fiscal situation will improve," said
Yuuki Sakurai, CEO of Fukoku Asset Management.
“Until the problem of sovereign debt, the last resort for
investors, is resolved, investor preference for liquid assets such as cash and
Japanese government bonds remains in place.”
The euro held firm, pushing to $1.3835 against the dollar.
The single currency rose as high as $1.3847 in New York on Tuesday.
China's annual inflation rate eased to 5.5% in October from
6.1% in September for a third straight month of decline from July’s three-year
peak and Premier Wen Jiabao said prices had fallen further since then.
Chinese producer prices rose 5% in the year through October,
down from a 6.5% rise in the year to September.
Easing price pressures helped fuel expectations that China
may start to ease monetary policy as exporters feel the impact from slowing
global growth. But Beijing is not seen loosening its grip on the property
market for now, despite recent signs of slowing sales.
Hong Kong’s Hang Seng Index rose by around 2% while the
Shanghai Composite Index gained 0.3%.
Brent crude gained for a fifth day, rising 0.5% to $115.57 a
barrel, and copper rose 1.5%, as factory output data affirmed China’s economy
is slowly moderating but not battling a sharp slowdown right now.
Italy yields surge
Berlusconi’s resignation could come this month, with votes
likely in coming weeks on Italian budget measures including austerity reforms
to cut debt and bring borrowing costs under control.
The yield on Italy’s benchmark 10-year bond hit a 14-year
high of 6.79% on Tuesday, approaching levels seen in the government bonds of
Portugal and Ireland when they had to seek bailouts.
Italy is the third largest economy in the eurozone and
failure to fix its debt problems would have a far bigger impact on the region
than difficulties in Greece.
Investor jitters over Italy’s debt has kept the spread on
Italian government bonds over Bunds to 490 basis points.
Despite the rise in riskier assets such as stocks and oil,
and a firmer euro and the dollar, gold gained as much as 0.5% to $1 794.09 an
ounce. It briefly rose above $1 800 on Tuesday, its highest in seven weeks,
before falling on news from Italy.
“While market focus has shifted to Italy from Greece, the
situation in the eurozone is far from instlling optimism,” said Yuichi Ikemizu,
branch manager for Standard Bank in Tokyo.
“Gold is underpinned by favourable factors, such as global
growth slowdown and the eurozone debt problems.”
Ikemizu said physical investors are sidelined given the high
price level, but funds buying helped pushed prices higher.
The market was temporarily relieved by Italy’s political
shakeup, although Greece remained undecided on its next leader. Party leaders
were locked in talks on a unity coalition, with the EU seeking an immediate
deal to save the country’s finances.
EU finance ministers failed to make progress on Tuesday on
ways to shore up sagging banks and avert a credit squeeze, as rising borrowing
costs for Italy make it more difficult for European banks to borrow as they are
increasingly reluctant to lend to one another.
Such uncertainties over key issues kept gains in Asian
credit markets modest.
The spreads on the iTraxx Asia ex-Japan investment grade
index - a gauge of investor appetite for risk - narrowed by about 5 basis
points early on Wednesday.
US Treasuries also edge up slightly on Wednesday in Asia.
“So what if Berlusconi eventually does the right thing?
We’ll rally for a period - maybe a day or two - then just sell off again,” said
a note from Societe Generale.
“The Greeks have delivered nothing, there’s growing feeling
that Italy will possibly go the same way, the EFSF has been shown to be no
panacea - and soon it won’t even get funded.”
Earlier this week, the European Financial Stability
Facility, the eurozone’s bailout fund, had difficulty finding buyers for
10-year bonds issued to support Ireland.