Hopeful European Markets Surge; Italian Yields Drop on Bill Passage

Devan Biswas
11 Nov, 2011
New York City

European markets advanced after Italy

[R]5:00 PM Frankfurt – European markets advanced after Italy’s Senate approved austerity measures. Italy is expected to have a technocrat led government as early as Sunday. The Italian bond yield declined to 6.45% but bond market sentiment remained cautious. Citigroup sold EMI businesses to Vivendi and Sony controlled consortium.[/R]

European markets surged after Italy’s Senate approved the austerity measures demanded by the European Union and other lenders.

The widely expected passage of the financial stability bill now moved to the lower house and is expected to be approved tomorrow and pave the way for the formation of the technocrat government.

Italian President Girgio Napolitano, played a crucial role in building a key consensus among rancorous law makers that will dissolve the current government and mark the end of Prime Minister Silvio Berlusconi’s reign after 15 years.

The government headed by Mario Monti is expected to be in place as early as Sunday before markets resume trading.

Task ahead of Monti-led government is clear but not easy and many current law makers are not expected to support the newly formed government and prefer early election. Several factions of the ruling PDL party and the Northern League are openly hostile to the technocratic government and prefer earlier elections.

However, for today, financial markets in Europe surged on the back of the passage of the bill and talks of new government. Indexes in Milan soared and most markets in Europe gained more than 2%. Italy is scheduled to sell €3 billion of 5-year bonds on Monday.

In Paris, the CAC-40 Index rose 82.24 or 2.7% to 3,147.08 and in Frankfurt the DAX Index increased 174.21 or 3% to 6,042.02.

Market indexes in Zurich added 1.5%, in Stockholm soared 3.3%, in Athens gained 2.2%, in Madrid gained 3% and in Milan jumped 3.9%.

Italian bond yields declined from its peak over 7% after the passage of the bill and dropped to as low as 6.43% before closing at 6.5%.

The bond markets eased after the bill passage but sentiment was fragile and tentative as investors worried how the implementation of the measures will cut the need for more support from the European Central Bank.

The central bank has played a key role in supporting the Italian bond auctions in the last five months as the interest rates on Italian bonds have nearly doubled in the last six months.

The bond market has been largely supported by the ECB purchases and the central bank has now amassed more than €183 billion of bonds of Southern European nations.

However, the central bank is a reluctant participant and is not expected to increase its holding of the peripheral nations bonds.

The euro edged up 0.6% to $1.368 in late trading in Frankfurt and New York, however nervous traders are still betting against the currency and large short positions hang over at $1.26 strike price.

Greece sworn in new Prime Minister Lucas Papademos on Friday with the main task of implementing labor and financial reforms and cut government spending. The deeply unpopular measures have divided the nation ahead of the new elections as early as February.

Greek government said in a statement that the interim government has reappointed Finance Minister Evangelos Venizelos to the post in the new coalition.

Gainers & Losers

Vivendi SA increased 40 cents to €15.87 after chief executive Jean-Bernard Levy told to investors that the company is planning to increase dividend.

Earlier, Vivendi’s Universal Music Group agreed to acquire record business from EMI for $1.9 billion according to two sources in London and New York.

Sony and a consortium of companies are expected to win the music publishing business for $2.1 billion, according to same sources. The two deals will fetch Citigroup Inc of $4.1 billion.

The two higher deals in the final hours emerged after both groups were able to access financing from European banks and UBS and Credit Suisse were rumoured to have played a key role in extending loans to Sony.

BMG Music and Warner Music participated in the bidding process and Warner dropped out of the race as the bid price increased.

Deutsche Bank AG increased 5.8% to €29, BNP Paribas SA rose 5.6% to €32.24 and Societe Generale SA added 4.2% to €18.85.

Intesa Sao Paolo SpA increased 10 cents to €1.28 and UniCredit SpA added 4 cents to 82 cents.

Assicurazioni Generali increased 28 cents to €12.42 after the Italian insurance giant said its full year operating profit is estimated to be between €4 billion and €4.7 billion.

The insurer also said nine months net profit fell 37% to 825 million and operating profit declined 1% to €3.1 billion.

BMW AG increased €1.12 to €58.73, Volkswagen AG increased 2.9% to €117.45 and Daimler AG added 80 cents to €34.04.