Italian tensions in focus as emerging markets steady

1 of 3. A man walks through the lobby of the London Stock Exchange August 5, 2011.

Credit: Reuters/Suzanne Plunkett

By David Gaffen

NEW YORK | Mon Aug 26, 2013 1:46pm EDT

NEW YORK (Reuters) - U.S. Treasury bonds rallied after a weaker-than-expected result for durable goods orders, but global equity markets were relatively calm in an otherwise slow Monday trading session.

One exception was in Italy, where the risk of a new government crisis sent shares and bonds tumbling.

Orders for long-lasting U.S. manufactured goods fell the most in nearly a year in July and a gauge of planned business spending on capital goods tumbled.

The weak data boosted prices in the U.S. bond market, where the benchmark 10-year U.S. Treasury note was up 3/32, the yield at 2.80 percent.

The durable goods report was the latest in a series of data points that have kept expectations for the Federal Reserve's next step muddled. Economists largely expect the Fed will start to reduce its $85 billion in monthly purchases of debt, but some uncertainty over this remains.

Craig Dismuke, chief economic strategist with Vining Sparks in Memphis, Tennessee, said the news would not stop the Fed from "tapering," but that the Fed "might taper less than expected."

The debate over the Fed's plans and its impact on emerging economies has dominated markets in recent weeks.

The Dow Jones industrial average .DJI was up 13.42 points, or 0.09 percent, at 15,023.93. The Standard & Poor's 500 Index .SPX was up 2.04 points, or 0.12 percent, at 1,665.54. The Nasdaq Composite Index .IXIC was up 18.76 points, or 0.51 percent, at 3,676.55.

"The numbers were disappointing this morning, but maybe we've returned to one of those odd situations where bad news is good for the market in terms of the Fed tapering," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Illinois.

In Italy, members of Silvio Berlusconi's center-right People of Freedom party said on Sunday they would force early elections if their center-left coalition allies voted next month to expel the former Italian premier over a tax fraud conviction.

Italian shares .FTMIB ended down 2.1 percent, but the broader euro zone stock market .STOXX50E was down just 0.2 percent. Italy's bonds fell, taking Spanish and Portuguese bonds down with them.

Investors are worried that Italy's plans to mend its finances will fall apart if the coalition crumbles and that being without a government could make it tricky for the European Central Bank to shield it from market pressure.

"If you have new elections now there is a high risk you would not have a majority government, so that is why we are seeing a widening of spreads in the periphery," said ING rate strategist Alessandro Giansanti. He noted the timing is poor, given Italy is set to sell bonds this week.

EMERGING LULL

After the turmoil of last week .MSCIEF, share indexes in India gained ground, though there were modest falls in Indonesia and both countries' currencies weakened again against the dollar. .

Investors are expecting improving returns from advanced economies while India, Indonesia and Brazil have all scrambled in recent weeks to try to stem destabilizing outflows that have crippled their currencies.

The Indian rupee weakened on Monday, tracking offshore rates, while month-end dollar demand from importers also dragged the currency lower. The country's central bank stepped in to sell dollars to try to restrain the decline, which has taken the rupee to record lows.

Against the yen, the dollar traded at 98.67 off Friday's peak of 99.15, while the euro bought $1.3369, having climbed as high as $1.3410.

Spot gold, which as an inflation hedge has benefited from the global flood of liquidity, briefly popped above $1,400 an ounce for the first time since early June, extending Friday's 1.5 percent rally. It last stood at $1,396.36.

U.S. crude slipped to $106.42 a barrel, while Brent was down slightly at $110.96.

(Additional reporting by Ellen Freilich and Rodrigo Campos; Editing by John Stonestreet, Ruth Pitchford and Dan Grebler)

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