Global shares gain, euro up as Italy votes for austerity

European shares rose on Friday and the euro eked out modest gains as investors bought beaten-down riskier assets, with markets increasingly hopeful that debt-laden Italy will implement economic reforms and regain market confidence.

Italy’s Senate approved a new budget law on Friday on austerity steps demanded by the European Union, clearing the way for the approval of the package in the lower house on Saturday and the formation of new emergency government, ending the reign of Prime Minister Silvio Berlusconi.

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The eye of the eurozone storm swung from Greece to Italy this week, with yields on benchmark 10-year Italian bonds having risen well above 7 percent - widely seen as unsustainable.

Analysts fear Italy’s potential inability to fund itself would be a systemic risk given the size of its economy and public debt, the third largest in the world.

But fears of a near-term collapse have eased somewhat, lifting stocks, commodities and the euro.

US stock index futures pointed to a higher open on Wall Street, with futures for the S&P 500, Dow Jones up 1 percent and 0.84 percent higher, respectively.

Wall Street had rallied on Thursday as investors cheered better-than-expected earnings from US companies.

The FTSE 300 index of top European shares was up 1.1 percent at 974.77 points after falling in the previous two sessions. Banks featured among the top gainers, with the sector index up 1.7 percent with Italian banks like Intesa Sanpaolo and Unicredit outperforming.

“The Italian market is the strongest, as this weekend we are hoping for some sort of progress on the Italian government going forward,” said Ian King, head of international equities at Legal & General, which has 356 billion pounds ($568 billion) under management.

Italian stocks as measured by the FTSE MIB index were up 2.2 percent.

The MSCI index of global shares was up 0.7 percent at 302.28, recouping some of its losses made in the past two sessions. Despite the bounce, it was headed for its second straight week of losses as markets continued to be rocked by political uncertainty in Italy and Greece.

ITALIAN BOND YIELDS STABILISE

The prospect of Italy buckling under its 2 trillion euros of debt has raised concern over Europe’s two-year-old crisis to a new level, because the euro zone’s bailout fund is simply not big enough to rescue the bloc’s third-largest economy.

Reported steady bond purchases by the European Central Bank have helped bring down yields on Italian bonds, but most traders said the euro zone was still in crisis mode.

While ECB buying and positive political developments were helpful, analysts are sceptical they will be enough to spur a sustained drop in Italian bond yields or a rise in the euro.

Ten-year Italian bond yields fell 27 basis points to 6.7 percent while five-year credit default swaps fell 18 basis points to 545 bps.

That saw the euro rise on the day, changing hands at $1.3660 and staying above a one-month low of $1.3484 touched on Thursday. For the week, the euro is still down about 1 percent.

“The main risk is to the downside in euro/dollar due to the debt situation in the euro zone, and the next couple of weeks will see a test of the downside,” said Niels Christensen, currency strategist at Nordea in Copenhagen.

Commodity markets were mostly firmer, with spot gold headed for a third week of gains, its longest winning stretch in more than two months. Brent crude was steady near at $113.71, poised for a third week of increases, while copper snapped five days of declines.

Reuters