Sunday, December 4, 2011

Today's Major Market Move: Italian Stock Market Gains 11% in Past Week

Europe has been hard at work trying to engineer a solution for the current debt crisis and the financial markets are anticipating that they are going to come up with something positive. Over the past week European equity markets have risen strongly and sovereign CDS prices have seen significant declines. Since 11/28, the best performing equity market globally has been Italy's (tied with Hungary), whose benchmark equity index rose 11%. Many of the other EZ stock markets saw gains of over 9%. Here's the list of the best performers:

Click here to go to the live table.

Italy's 5 Year CDS have also performed well over that time frame, declining 18%. When we plot the FTSE MIB Index against the 5 Year CDS prices, we see how the sovereign credit markets are essentially driving stock prices. The inverse correlation is tight (although the magnitude of changes in the CDS price is higher):

Click here to go to the live chart.

The austerity measures haven't really begun to take effect in Italy yet so we are about to find out if we're going to see the same kind of resistance as that which occurred in Greece. The belt tightening might further widen the rift between the industrious north (the ants) and the more socialist south (the grasshoppers) which may make an already volatile situation even more contentious. That is an extra variable that Greece did not have to contend with.

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