Europe Recover From Low's This Time But Not Sure Reovery

Italian bond sale boosts stock rally

The euro has risen to its highest level in a week against the dollar and the region’s bourses are rallying after Italy completed a €7.5bn bond sale.

For the time being, at least, traders are ignoring the punishingly high yields

Rome was forced to pay and instead focusing on the decent appetite for the bonds.

Italy sold three-year bonds at a gross yield of 7.89 per cent and 10-year bonds at a cost of 7.56 per cent.

Most analysts believe yields above 7 per cent are unsustainable in the long run.

The euro is up 0.6 per cent, having earlier touched a high of $1.3442, while the FTSE Eurofirst equity index is also up 0.6 per cent.

“Markets are clearly giving the policymakers the benefit of doubt, and in the process shaking off any negative news and are latching onto even small positive catalysts,” say currencies analysts at BNP Paribas.

The focus is squarely on Europe after Moody’s said it was considering a downgrade of the subordinated debt of 87 European banks – primarily in Spain, Italy, Austria and France. Furthermore, talk that France’s sovereign debt rating could be put on “negative” outlook by Standard & Poor’s is also hurting sentiment.

Later, traders will be watching a meeting of eurozone finance ministers in Brussels, where they plan to agree the details of the expansion of the European Financial Stability Fund.

Rome’s auction was the second of a series of big eurozone sovereign bond auctions this week. On Thursday, France and Spain plan to tap the market.

But sovereign debt fears are also making themselves felt beyond the eurozone. A move overnight by Fitch, the rating agency, to put the US triple A credit rating on “negative” watch has reminded traders that the eurozone is not the only part of the world where governments are heavily indebted and facing low growth. In the UK, chancellor George Osborne’s autumn statement at 12.30 GMT may further reinforce that message.

In a statement after the US market closed, Fitch Ratings said it had “declining confidence that timely fiscal measures necessary to place US public finances on a sustainable path and secure the US triple A sovereign rating will be forthcoming”.

Asian stocks extended their gains in Tuesday’s session, although with a little more trepidation than on Monday. Japan’s Nikkei 225 Stock Average advanced 1.6 per cent, even as the country’s jobless rate rose for the first time in three months. South Korea’s Kospi Composite jumped 2.3 per cent, Hong Kong’s Hang Seng index advanced 1.2 per cent and China’s Shanghai Composite index added 1.2 per cent.

Commodities markets are taking their lead from equities. Nymex WTI oil, the US benchmark, is 59 cents higher at $98.80, while Brent, its European counterpart, rose above $110 for the first time in a week. Gold is marginally higher at $1,714 a troy ounce and copper is 0.9 per cent stronger.