GLOBAL MARKETS-Italian political uncertainty sends markets into spin

Mon Dec 10, 2012 8:31am EST

* Italian Prime Minister resignation plans knock markets

* Euro falls towards two week low, steadies above $1.29

* European shares slide, Milan falls as much as 3.5 pct

* Oil, copper firm after China data

By Marc Jones

LONDON, Dec 10 (Reuters) - The euro slipped towards a two-week low on Monday while shares and Italian bond prices also fell after Italian Prime Minister Mario Monti's decision to resign deepened euro zone uncertainty.

Monti announced over the weekend he would resign once the 2013 budget is approved, raising questions over who will take the reins of the euro zone's third largest economy after elections expected in February.

The competent economist has become an investor favourite over the last year for guiding through a string of reforms and the prospect of scandal-tainted former leader Silvio Berlusconi launching a bid to reclaim power rattled markets.

Top European shares on the FTSEurofirst 300 index fell as much as 0.5 percent and were down 0.3 percent by 1300 GMT with Wall Street also expected to open lower .

A 3.5 percent fall on Milan's Ftse Mib and 2 percent on Madrid's IBEX were flanked by smaller falls in London, Paris and Frankfurt in some of the biggest moves of the year.

The euro was trading near Friday's two-week low of $1.2876 before early afternoon support helped it climb back to $1.29125. In bond markets, Italian bonds fell sharply, with yields on benchmark 10-year debt up 36 basis points at 4.87 percent.

"The political manoeuvrings of Il Cavaliere (Berlusconi) have already caused the sharpest sell-off in Italian financial markets since ECB president Mario Draghi's game-changing pledge in late July," said Nicholas Spiro, head of Spiro Sovereign Strategy.

"Mr. Berlusconi is not the cause of Italy's deep-seated and long-standing economic problems, but he epitomises the dysfunctional nature of Italian politics."

The government bonds of Spain, the other major euro zone economy deep in crisis, fell in tandem with their Italian counterparts while the cost of insuring both countries' debt against default also rose.

PROPER CONTRACTION

Spanish Economy Minister Luis de Guindos appeared to be watching as he warned his country would suffer contagion from Italy's political turmoil. 

Poor economic data compounded the jitters. French industrial output was much weaker than expected in October and tepid export growth reduced Germany's trade surplus to its lowest level in over half a year.

This pointed to more than a brief, shallow economic dip as Germany's euro zone export markets struggle.

"Besides weak industrial output this is another bleak piece of data that points to contraction in the fourth quarter - and a proper contraction at that," said Thomas Hessler, an economist at HSBC Trinkaus said of the German trade data.

Things were not going completely smoothly in Greece either, where the country's debt buy back offer was extended in a bid to drum up enough investor uptake for the deal.

Despite the initial lack of investor interest, the scheme is expected to ultimately hit its targets since Greek banks - whose own fate depends on a successful buyback - are expected to stump up the shortfall.

CHINA LIFT

Balancing the European concerns were data from China which showed factory output in the world's number two economy accelerated to an eight-month high in November.

The figures followed a surprise drop in U.S. unemployment on Friday and allowed investors to look past some more disappointing Chinese trade numbers.

Copper prices hit their highest in almost two months on the upbeat Chinese sentiment, gold firmed 0.4 percent to around $1,711 an ounce and oil snapped five straight days of losses to climb back to $108 a barrel.

"It does appear, based on the evidence of the data, that the Chinese economy has bottomed out," said Ben Le Brun, a market analyst at OptionsXpress in Sydney.

In contrast to the later European gloom, the Chinese data helped Asian equity investors push MSCI's broadest index of Asia Pacific shares outside Japan to a fresh 16-month high.

Back in currency markets, the dollar rose roughly 0.3 percent against a basket of major currencies due to the euro's weakness although an expected announcement later this week of more Federal Reserve bond buying limited the gains.

Many economists expect the Fed will announce on Wednesday that it will keep pumping money into the economy during 2013 in a bid to bring down unemployment.

"People are just positioning themselves for the last decent week we could have in terms of data before getting into the Christmas period," said David Bloom, global head of FX research at HSBC. "The Fed meeting will be important."

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