LONDON (Reuters) - Domestic political tensions drove Italian shares and bonds lower on Monday, while a steady dollar and lower U.S. debt yields gave battered emerging markets a second day of relative calm.
The dollar slipped against the yen and gold traded near 11-week highs, briefly topping $1,400 an ounce after weak U.S. housing data on Friday saw some investors hedge bets on an imminent move by the Federal Reserve to unwind monetary stimulus, much of which has flooded into developing markets.
The debate over the Fed’s plans and the impact it is having on emerging markets has dominated markets in recent weeks, but it was the euro zone crisis that was back in the spotlight on Monday.
Members of Silvio Berlusconi’s center-right People of Freedom (PDL) party said on Sunday they would force early elections if their center-left coalition allies voted next month to expel the former Italian premier over a tax fraud conviction.
Italian shares .FTMIB were down more than 2 percent by mid-morning, leading the broader euro zone stock market .STOXX50E lower, and the country’s bonds fell, taking Spanish and Portuguese bonds down with them. <GVD/EUR>
Investors are worried the country’s plans to mend its finances will fall apart if the coalition crumbles and that a period without a government could make it tricky for the European Central Bank to shield it from market pressure.
“If you have new elections now there is a high risk you would not have a majority government so that is why we are seeing a widening of spreads in the periphery,” said ING rate strategist Alessandro Giansanti adding the timing was not ideal considering Italy is set to sell bonds this week.
European stock market volatility .V2TX was up almost 5 percent and German government bonds, an asset favored at times of stress, were in demand though in currency markets there was little movement from the euro.
Emerging markets were relatively calm after the turmoil of last week. .MSCIEF
Share indexes in India made ground though there were modest falls in Indonesia and both countries’ currencies weakened again against the dollar. <EMRG/FRX>.
India, Indonesia and Brazil have scrambled to try to stem destabilizing outflows that have crippled their currencies, with the rupee skidding to record lows.
Global central bankers at the Fed’s annual Jackson Hole policy conference were warned over the weekend that financial stability was at risk as ultra-easy policies that have flooded the world with cash were slowly unwound.
U.S. Treasury yields tend to set the benchmark for borrowing costs across the globe, so their recent rise - which is expected to continue as the Fed winds down support- is making it more difficult for indebted countries and firms to pay their bills.
Wall Street was expected to open down around 0.2 percent when trading resumes, after the S&P 500 .SPX managed to snap a two-week run of weekly falls on Friday.
John Hardy, head of FX strategy for Saxo bank, said the Fed was bound to take measures if the turmoil in markets over its stimulus scale-back didn’t settle down.
“The evidence we have seen since 2008 is that every time things get a little ugly the Fed steps in with more liquidity, so they will do whatever they have to do,” he said.
“Markets have been dependent on monetary morphine for forever so why not just have another big hit of it.”
Data out on Friday showed sales of new U.S. single-family homes fell to their lowest in nine months, raising doubts about whether the Fed can afford to start to pull back next month and giving investors an excuse to buy back beaten-down assets.
Against the yen, the dollar traded at 98.60 off Friday’s peak of 99.15, while the euro bought $1.3372, having climbed as high as $1.3410.
Spot gold, which as an inflation hedge has benefited from the global flood of liquidity, briefly popped above $1,400 an ounce for the first time since early June, extending Friday’s 1.5 percent rally. It last stood at $1,394.50.
U.S. crude was bid at $106.50 a barrel, while Brent began to slide back having extended gains above $111 a barrel as rising tensions in Syria added to concerns of increased unrest in the Middle East that could disrupt supply.
In Shanghai trading, copper rose to its highest in over four months on optimism about global growth though traders said the moves were being amplified by the closure of London markets for a public holiday.
Reporting by Marc Jones; Editing by John Stonestreet