David Morris
YESTERDAY saw the removal of some of the political uncertainty that has dogged Greece over the past week. A new coalition government is to be formed, Papandreou is standing down as Prime Minister and a general election is expected early next year. All this should be enough to ensure that Greece receives its next bailout tranche, so it should be able to struggle on for another month or so.

Attention has turned back to Italy. Few investors take either the proposed Italian austerity measures or Prime Minister Berlusconi very seriously. The country’s bonds fell sharply again yesterday morning, with yields approaching dangerously high levels. They bounced sharply higher later in the day on speculation that Silvio Berlusconi was on the point of resigning, but reversed quickly after the Italian Prime Minister denied the stories.

But a change in leadership in a few Eurozone countries won’t address the region’s debt crisis. And it looks like a new European Central Bank (ECB) president won’t either. So far, the European Central Bank has thrown its weight behind Italy’s bonds in an attempt to keep a lid on yields. But at his first ECB meeting as President, Mario Draghi offered a warning:

“What makes you think that to become the lender of last resort for governments is actually the thing that you need to keep the euro area together? I don’t think that is really in the remit of the ECB.”

This came as a surprise to those observers who felt that Draghi would be more open to intervention. But he is now insisting that any bond purchases should be temporary and limited in scope. This puts him more in line with Bundesbank thinking and has helped to reinforce his hawkish reputation.

With Italian bonds under such pressure, the major stock indices are still struggling to break above significant resistance. For the S&P, this comes in at 1,260 which is the 61.8 per cent Fibonacci retracement of the May/October sell-off. For the FTSE, the 5,600 level is proving to be an obstacle. For now, all the major indices are positively correlated with the euro. A rally in the single currency will pull stocks up with it. But a break below $1.3650-60 would be a big red flag for equities.

Tomorrow morning David Morrison will speak at a GFT and City A.M. event. See or call 0808 208 5197.