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GLOBAL MARKETS-Italian worries overshadow calmer emerging markets
August 26, 2013 / 11:31 AM / in 4 years

GLOBAL MARKETS-Italian worries overshadow calmer emerging markets

* Italian stocks, bonds fall on Berlusconi threat
    * Weak U.S. goods data tempers September Fed tapering view
    * Gold briefly tops $1,400 an ounce
    * Currency markets subdued, dollar finds support after dip

    By Marc Jones
    LONDON, Aug 26 (Reuters) - The risk of a new government
crisis sent Italian shares and bonds tumbling on Monday, while a
weaker dollar and lower U.S. debt yields gave battered emerging
markets a second day of relative calm.
    Wall Street was expected to start down around 0.1 percent
  when trading resumes, with investors already
digesting data that showed weaker than expected durable goods
orders. 
     The dollar slipped against the yen and gold traded near
11-week highs, briefly topping $1,400 an ounce after
similarly-poor U.S. housing data on Friday prompted some
investors to hedge bets on an imminent move by the Federal
Reserve to unwind monetary stimulus.
    The debate over the Fed's plans and its impact on emerging
economies 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 centre-right People of
Freedom (PDL) party said on Sunday they would force early
elections if their centre-left coalition allies voted next month
to expel the former Italian premier over a tax fraud conviction.
 
    Italian shares were down more than 2.5 percent by
early afternoon, leading the broader euro zone stock market
 lower, and the country's bonds fell,
taking Spanish and Portuguese bonds down with them. 
    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 is poor given
Italy is set to sell bonds this week.
    European stock market volatility was up almost 5
percent and German government bonds, an asset
favoured at times of stress, were in demand, although in
currency markets there was little movement from the euro.
    
    EMERGING LULL 
    After the turmoil of last week, share indexes in
India made ground though there were modest falls in Indonesia
and both countries' currencies weakened again against the
dollar..
    Investors are expecting improving returns from advanced
economies while India, Indonesia and Brazil have all scrambled
in recent weeks to try to stem destabilising outflows that have
crippled their currencies. 
    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.
    Yields dropped to 2.7963 percent after the U.S. durable
goods orders from above 2.8 percent beforehand. 
  
  
    'MONETARY MORPHINE'
    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."
    The weak goods numbers compounded the impact of data on
Friday which showed sales of new U.S. 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 98.3360 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 $1,397.50. 
    U.S. crude was slipping at $106.25 a barrel, while
Brent was back at $110.75 began having earlier 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 in moves traders said were amplified by the
closure of London markets for a public holiday.

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