Italian tensions in focus as emerging markets steady

Mon Aug 26, 2013 7:29am EDT
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By Marc Jones

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 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.   Continued...

A man looks at an electronic board displaying stock index outside a bank in downtown Milan June 13, 2013. REUTERS/Alessandro Garofalo