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Italian jitters fuel global stocks slump

Nov 07 2011 18:49 Reuters

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New York - Global equities and the euro fell on Monday as uncertainty in Italy fueled concern the euro zone debt crisis could engulf the bloc’s third-biggest economy, prompting investors to cut exposure to riskier assets.

Italian Prime Minister Silvio Berlusconi defied heavy pressure to resign as he faces a rebellion in his party. A recovery in Italian stocks and a pullback in government bond yields reversed when he denied reports that he would resign within hours.

“Berlusconi’s reputation is so tarnished at this point that it’s difficult to see how he gets a difficult austerity package through,” said Stephen Massocca, managing director at Wedbush Morgan in San Francisco. “If he is moved aside for someone who can be more influential, then there is a greater chance that something happens.”

Benchmark Italian government bond yields dipped below 6.6 percent after earlier brushing 6.67, their highest since 1997. Borrowing costs of 7 percent and above are widely viewed as unsustainable.

Helping to cap equity losses, a paper prepared by the European Investment Bank for European finance ministers said the EIB could provide up to 74 billion euros of lending support to European banks over two years if its capital base were reinforced in part with cash from shareholders.
European banks’ liquidity issues are seen as a key element in the current crisis.

In mid-morning trading in New York, the Dow Jones industrial average dipped 32.46 points, or 0.27 percent, to 11,950.78. The S&P 500 fell 4.62 points, or 0.37 percent, to 1,248.61. The Nasdaq Composite dropped 24.32 points, or 0.91 percent, to 2,661.83.

The FTSEurofirst was last down 0.5 percent after a 3.8 percent decline last week that ended a five-week rally. The MSCI world equity index was off 0.3 percent.
The euro edged lower versus the U.S. dollar in choppy trading. It briefly traded positive earlier as overall risk sentiment improved.

U.S. Treasury debt prices backed off overnight gains as turmoil in Italy and Greece had investors pondering the eventual path of the euro zone debt crisis.
“Italy has come off their widest levels so we are moving in sympathy with them; as they improve we sell off a bit, so the flight-to-quality flows happened overnight and they have subsided,” said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

Gold futures rose almost 1 percent as investors piled into the traditional safe-haven asset on uncertainty about Europe’s debt crisis.

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 debt problems from spreading to other countries in the euro zone.

While Greece is negotiating a new government to help receive its EU 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.
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