Italian yields down, stocks up. Simple as that.

Italy is one step closer to an interim government after the Italian Senate passed the current budget package which will be followed tomorrow with a vote by their lower house. Yields are falling for a 2nd day with the 2 yr yield in particular now down 150 bps from yesterday’s intraday high. Once a new government is in place, markets will focus intently on whether Italy quickly and forcefully implements the budget deal. The stakes cannot be higher with the world’s 3rd largest bond market staring into the abyss (sorry for the hyperbole but I can’t express enough the danger to the global economy if Italy loses access to the capital markets). Following comments from ECB members yesterday and one last week pushing back on those that want them to act like the Fed, ECB exec Paramo said “the ECB is last resort lender for banks because that is its function, but not for governments because the unions treaty explicitly forbids it.” Those that don’t want to say no to its people (politicians) and markets that love to get bailed out, want ECB printing. Portugal’s President said today “the ECB has to go beyond a narrow interpretation of its mission and should be prepared for foreseeable intervention in the secondary market, not as the central bank has done up to now.” What the ECB ultimately does may single handedly be the driver of markets as we enter 2012. In Asia, South Korea and Malaysia did not follow Indonesia as they kept interest rates unchanged as expected. India said IP in Sept rose just 1.9% y/o/y, below forecasts of up 3.5% and the slowest rate of gain since Sept ’09.

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