Euro, stocks up on hopes Italy may avoid crisis
Global equities and the euro rallied Tuesday after Italian Prime Minister Silvio Berlusconi said he would resign, sparking optimism that a new leader will act more aggressively to tackle Italy's debt problem, a critical step in containing the euro zone's credit crisis.
Investors bid up risky assets like stocks and the euro on hopes that Italy, the euro zone's third-largest economy, would avoid a crisis similar to the one that forced Greece to seek a bailout.
Berlusconi's offer could ease the passage of unpopular austerity measures needed to reduce debt and lower Italian government bond yields. The yield on Italy's benchmark 10-year bond hit a 14-year high earlier on Tuesday, approaching levels seen in the government bonds of Portugal and Ireland when they had to seek bailouts.
Berlusconi, a billionaire media magnate beset by corruption trials and sex scandals, said he would step down as soon as parliament passed urgent reforms, in votes expected later this month.
"We'll get new blood that will allow us to start being constructive and moving on reform," said Mark Lookabill, wealth adviser at Carson Wealth Management in Omaha, Nebraska.
Analysts, however, warned that gains may prove unsustainable because it remains unclear whether a new government would be able to promote growth and implement spending cuts to bring down debt levels. At 120 percent of gross domestic product, Rome's massive debt is the second highest in Europe.
"I guess it resolved a little bit of political impasse that they had, but it also opens the door to further political disarray in Italy, potentially delaying passage and implementation of austerity measures," said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey.
The MSCI world equity index was last trading 0.9 percent higher.
On Wall Street, the Dow Jones industrial average ended up 101.79 points, or 0.84 percent, at 12,170.18. The S&P 500 gained 14.80 points, or 1.17 percent, to 1,275.92. The Nasdaq Composite rose 32.24 points, or 1.20 percent, to 2,727.49.
The benchmark 10-year U.S. Treasury note was down 17/32, with the yield at 2.0804 percent, as its safe-haven appeal shrank.
EURO GAINS SEEN LIMITED
The euro hit session highs after the Berlusconi news and was last up 0.5 percent at $1.3841.
The euro remained slightly lower versus the Swiss franc and flat against the yen.
Dolan of Forex.com noted the burdens of a swelling deficit and stagnating growth still faced by Italy, and the challenge that presents to a sustained rise in the euro.
"Italy still has that major problem to get over and a change in political leadership is not going to resolve that," he said.
Investors earlier had driven the yield on the Italian 10-year bond to a high near 6.8 percent.
Focus has shifted in the past few days from Greece's weak economy and finances to Italy's deficit. With borrowing costs soaring and 1.9 trillion euros in public debt, Italy -- as opposed to Greece -- is too large to bail out.
U.S. oil prices jumped a fifth straight day on Tuesday and most other commodities also rose on the news of Berlusconi's resignation.
The 19-commodity Reuters-Jefferies CRB index finished nearly flat, up 0.4 percent with strong gains in U.S. crude making up for losses in gold, coffee and cocoa.
Gold rose above $1,800 an ounce for the first time in more than a month before settling down as Berlusconi's resignation took out some of the fear factor in financial markets. Gold traditionally thrives as an insurance against market fears.
The spot price of gold, which tracks trades in bullion , hit a seven-week high of $1,802.60 before slipping to below $1,784 late afternoon in New York -- down more than half a percent from late Monday levels. (Reporting by Rodrigo Campos; Additional reporting by Ryan Vlastelica and Wanfeng Zhou)