Markets hoping for economic decisions

WEDNESDAY’S sharp sell-off across major global stock indices showed just how skittish markets are currently. The slump in Italian bond prices did the damage as yields flew higher.

The situation calmed down towards the end of the week as the political situation in Greece and Italy became clearer. Former ECB vice president Lucas Papademos was sworn in as the new Greek prime minister on Friday, while ex-European Commissioner Mario Monti is expected to replace Silvio Berlusconi.

Investors feel that both appointments increase the chances that difficult economic decisions will finally be made. However, agreeing to take unpalatable measures is quite different from implementing them. Greek and Italian policymakers have to persuade their respective citizens that further economic hardship now will ultimately lead to better times in the future.

Meanwhile, there is a feeling that Italian 10-year bond yields would still be well above 7 per cent without considerable intervention from the ECB in the secondary market.

The FTSE 100 index is called to open down 5 points at 5540. The German DAX is expected to open down 7 points at 6050 and the French CAC 40 is forecast to open down 4 points at 3145.

Tomorrow sees the release of UK inflation numbers. The Bank of England (BoE) will be hoping for signs of easing pricing pressures with the CPI ticking back down towards 5 per cent. A reading above 5.2 per cent is likely to attract criticism of the Bank following last month’s controversial decision by the MPC to increase quantitative easing by £75bn. We will also see US PPI and Retail Sales tomorrow, and the BoE releases its quarterly inflation report on Wednesday. US Housing Starts, Building Permits and the Philly Fed Manufacturing Index are all released on Thursday.

The US third quarter earnings season is rapidly winding down now. According to Thomson Reuters, of the 90 per cent of S&P constituents who have now reported, 70 per cent have beaten estimates. This is helping to persuade many investors that the US economy will emerge relatively unscathed from the ongoing debt crisis in Europe. This view may prove to be overly optimistic.

Martin Slaney is director of global product management at GFT