Political dysfunction in Italy is common/China/DC

If there is one certainty in Italian politics, it’s uncertainty. As the US has had just 12 President’s since WWII, Italy has had 26 different PM’s. The difference now though of course is the fragile state of the country’s finances where consistent policy is most desired. With the Monti resignation announcement which will take place after the 2013 budget is finalized, 5 yr Italian CDS is wider by 40 bps to 300, a 3 week high and bonds are down sharply. The MIB index is lower for a 4th day and 5.6% during this time frame. The euro, while near a 2 1/2 week low vs the US$ on a closing basis, is only down modestly. Data wise in the region, Italy and France reported weaker than expected IP #’s after Germany, UK and the Netherlands did on Friday. German exports and imports though were better than expected in Nov. With Greece’s debt buyback, they are extending the tender deadline to tomorrow but signs so far point to success in terms of total amount of bonds sold back.

The main offset to the markets Italian concerns this morning is the mostly better than expected Chinese economic data over the weekend. Retail sales and IP rose the most since March and CPI, while at 2% up from 1.7%, was a touch below estimates. Fixed asset investment ytd was in line, up 20.7% y/o/y. Trade though in Nov was weaker than forecasted as both exports and imports missed expectations. Overall, the data was taken positively as the Shanghai index rose to a 4 1/2 week high.

On the fiscal discussions in DC, the Sunday morning talk shows didn’t reveal too much. More Republicans are throwing in the towel on tax increases but on the condition of stricter spending restraint where the two sides are still far apart. The market bottom line, commodities are trading up on the China news but the S&P’s lower are more focused on Europe and little new news from DC.

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