Europe stronger as Italy fears ease and US housing data beats expectation

European markets closed in positive territory as US housing data helped lift sentiment a day after inconclusive election results in Italy fuelled fears of political instability in the eurozone.

Italian government debt was very much in focus this morning as the Treasury sold €4 billion worth of new 10-year bonds at a yield of 4.83%. The yield was actually up 0.5% and at the highest level since October 2012, however, there was healthy demand for the bonds and the yield did remain below an important psychological level of 5%, well below the 6.6% level which it reached in July last year.

This suggests that the markets don’t view the situation as disastrous quite yet. Although there was a strong knee jerk reaction yesterday, there is a feeling that it may have been a little over done. If Italy ends up with a government which does not undertake reforms immediately, it would not be too catastrophic. However, it is essential that the new government doesn’t start to unravel reforms which have already gone through, therefore allowing investors to still have confidence that the ECB back stop or OMT programme will remain an option.

As the afternoon progressed, investors took further inspiration from across the pond as Federal Reserve Chairman Ben Bernanke continued with the semi-annual report to Congress on the economy and monetary policy. He repeated his strong support for the Fed’s stimulus efforts, which eased concerns over a potential early retreat from the bond buying programme. Pending home sales in the US also rose 4.5% in January to the highest level since April 2010. This data was particularly well received, given the fall of 1.7% in pending home sales in December.

Here in the UK Petrofac was the biggest fallers, shedding over 6% after disappointing with a 9% rise in revenue and 17% increase in net profit. Additionally their plans to invest $1 billion in capital outlays over the coming five years did little to please the markets.

On the positive side Weir topped the leader board, up over 7% after releasing record profits and margins for last year. Additionally the fact that they expect another strong year in 2013 pleased the markets further.

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