Stock Futures Rally, But Italy Looms

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Stock-index futures followed European shares deep into the green on Tuesday, but market participants remained vigilant of the unfolding drama in Italy.

Today's Markets

As of 9:00 a.m. ET, Dow Jones Industrial Average futures jumped 78 points to 12,085, S&P 500 futures climbed 7.8 points to 1,265 and Nasdaq 100 futures rose 19.5 points to 2,389.

Wall Street is off to a strong week after stocks rebounded and posted sizeable gains in the prior session, and European shares were rallying Tuesday.

European blue chips soared 1.9% in morning trading there as a result of strong corporate earnings from big-name companies, like Vodafone (NYSE:VOD) and Intercontinental Hotels (NYSE:IHG), according to Chris Beauchamp, an analyst at London-based trading firm IG Index.  The euro inched higher by 0.11% to $1.379.

However, analysts at Nomura note it wouldn't take much for market sentiment to change again. Indeed, all eyes have once again turned to the euro zone, where leaders are racing to stem the sovereign debt crisis that is now threatening Italy, the currency bloc's third-largest economy.

Italy, which has a 120% debt to economic output level, has seen the yields on its benchmark 10-year note spike to 6.6% as worries have mounted it may need a rescue like its peers, such as Greece, have recently required.

The country's borrowing costs are "clearly unsustainable," according to economists at Barclays Capital. The higher the yield on its debt, the more it costs a country to borrow in the private markets.  With Italy's high level of public debt, such a high interest rate make it extremely difficult, if not impossible, for the country to cut its debt without support, analysts say.

European officials have been pressing the government, led by embattled Prime Minister Silvio Berlusconi, to take a slew of reforms in an effort to cut the debt load down and restore the market's faith in Italy. However, Berlusconi faces stiff resistance in Italy's parliament, and has seen his majority teeter on the brink of evaporation.  Indeed, he faces a key test vote in parliament on Tuesday.

Analysts say if he loses, it could open the door to a so-called no-confidence vote, which, if lost, could pave the way for the ouster of the premiere.  If Berlusconi's government collapses, Italy will likely have two choices: form a temporary unity coalition government, or call early elections. In either case, rumors that  Berlusconi may resign actually eased the yield on Italian debt slightly on Monday.

On the U.S. front, (NASDAQ:PCLN), the biggest American travel website by market capitalization, saw its earnings more than double in the third quarter from the same period last year.

Dynegy's (NYSE:DYN) holding company filed for Chapter 11 bankruptcy protection, while its parent company did not.  The  method the power generation company used to file may protect shareholders in the parent company, while causing the bondholders to take hefty losses, which is unusual, the Wall Street Journal reports.

There are no major economic reports on tap for Tuesday.

Energy markets were in the green.  The benchmark New York crude oil contract climbed 83 cents, or 0.87%, to $96.38 a barrel.  Wholesale RBOB gasoline gained a penny, or 0.37%, to $2.74 a gallon.

Gold nudged higher by $2.20, or 0.1%, to $1,793 a troy ounce.  The benchmark 10-year Treasury note yields 2.05% from 2.038%.

Foreign Markets

European blue chips soared 1.9%, the English FTSE 100 jumped 1.4% to 5,590 and the German DAX rallied 1.7% to 6,029.

In Asia, the Japanese Nikkei 225 fell 1.3% to 8,656 and the Chinese Hang Seng held steady at 19,678.