Picture: REUTERS
Picture: REUTERS

LONDON — The euro fell and Italian government bond yields eased on Thursday as fear over political stalemate in Italy was offset by confidence the European Central Bank (ECB) would offer support if the crisis worsened.

Reassuring commitments from US Federal Reserve chairman Ben Bernanke on its stimulus plans reinforced investors’ belief that major central banks would continue steps to support the world’s economy, which also helped lift stocks.

Investors fear the uncertain situation in Italy, the eurozone’s third-largest economy, could reignite the bloc’s crisis, now in its fourth year. Some have questioned whether the ECB’s pledge to help struggling member states which ask for aid can be utilised if there is no workable government.

"There will be a risk premium on Italian yields until a new government is formed and we know what they’re going to do with structural and fiscal reforms," said Nick Stamenkovic, strategist at RIA Capital Markets.

"But we’re not going to see a return to the levels we saw a year ago because the ECB has pledged to use its balance sheet if necessary."

Ten-year Italian bond yields had fallen seven basis points to 4.75% by midmorning. This month has been the first in which they have seen significant falls in value since ECB president Mario Draghi promised in July to do whatever was needed to prevent a breakup of the euro.

The euro was down 0.2% on the day at $1.3109, and was expected to remain weak although it has recovered many of the losses it made earlier in the week, which took it to a near an eight-week trough of $1.3018 on Tuesday.

"We have got a lot of Italian election uncertainty in the next two to three weeks. There is going to be a lot of political horse trading going into March 15, when the parliament reconvenes, which doesn’t sound like it is going to be good for the euro," ING forex strategy head Chris Turner said.

The prospect of prolonged uncertainty in the euro region’s third-largest economy caused sharp falls on world markets as the election results emerged, but they were calmer on Wednesday after solid demand for an Italian government debt sale.

"We don’t expect any plans or changes to be implemented rapidly, so that’s the reason perhaps the market is giving Italy some breathing space here. As long as they don’t reverse reforms that have already been implemented," City Index market analyst Fiona Cincotta said.

However, German bond futures, a barometer of safe-haven demand, also trimmed many of their early losses, indicating that concern about the eurozone was not far away.

The main Bund futures contract was about two ticks lower on the day, having earlier lost about 13 ticks.

Some bond investors remain worried that the ECB’s ability to respond to problems in Italy may be limited, adding to concern about an already weak regional growth outlook.

"I can’t see any game-changing growth numbers, I can’t see a policy response to the Italian elections from the ECB, and I can’t see any imminent headlines from Italy that will suggest some progress," said Jack Kelly, investment director for global government bonds at Standard Life Investments.

Stimulus secure

Meanwhile equity markets were enjoying support from reassuring comments by US Federal Reserve chairman Ben Bernanke on the prospect of continued monetary easing to support the US economic recovery.

The MSCI’s world equity index rose 0.4% after a strong session on Wall Street following Mr Bernanke’s comments and big gains in Hong Kong and Tokyo earlier.

Europe’s broad FTSE Eurofirst 300 index gained around 0.35%, while London’s FTSE 100, Paris’s CAC 40 and Frankfurt’s DAX were between 0.25 and 0.5% higher.

A rise US stock futures hinted at a firmer start on Wall Street as well.

Following a blistering start to year, and a long unbroken run of gains in the second half of last year thanks to aggressive support from the world’s major central banks, many equity markets have undergone a correction in February.

The broad FTSEurofirst 300 is on track for its first negative month since May last year, while the MSCI World index is likely to see its first setback since last October.

By contrast the dollar has had its strongest month since last May as investors keen to cash in on improving US growth prospects — and those looking for safety in case euro zone tensions return — have bought into the greenback.

Elsewhere the yen was slightly weaker after Japanese Prime Minister Shinzo Abe nominated Asian Development Bank president Haruhiko Kuroda, a strong supporter of easier monetary policy, to be the next Bank of Japan governor.

Commodities were also generally firmer, with US crude up 0.25% to $92.54 a barrel while Brent was barely changed at $111.89.

Gold managed a slight rise to about $1,600 an ounce but was headed for its longest stretch of monthly declines in more than 16 years as an improving economic outlook dims its safe-haven appeal.