European shares posted modest gains Friday as investors bet that the disappointing data published today in China will elicit more direct stimulus policy makes in the world’s fastest-growing economy.
The figures largely overshadowed a two-notch downgrade to the near-edge of junk status for Italy’s debt rating by Moody's Investors Service. The move late Thursday provided investors with a stark reminder this morning of the need for European cohesion in solving the region's spiralling debt crisis. Moody's specifically warned that Italy's financial challenges could prevent them from accessing international capital markets in the near future - a hugely significant concern given the fact that Italy needs to borrow at least €112bn between now and the end of the year.
The move also brings to the fore the dangers of any delay in ratifying the European Stability Mechanism, the permanent bailout fund that will be use, inter alia, to support Italian bond prices in the open market. Germany's Constitutional Court may take several weeks - or even longer - to hear and debate legal challenges to Germany's participation in the €700bn Fund, making full EU ratification impossible.
That said, Italy did manage to see around €3bn in 3 year bonds that attracted the lowest yield for similar maturity debt since May, suggesting investors are paying decreasing attention to the late moves of the major ratings agencies.