Arrivederci Berlusconi, Awaiting Chinese CPI

Embattled Italian PM Berlusconi agreed to step down after austerity measures are passed sending risk assets higher on Tuesday. CHF and EUR were the top performers, while USD and AUD lagged. Greece could name a new PM in the coming hours and China will release CPI data due at 2:00 GMT.

Going into the day the focus was on whether Berlusconi would survive a confidence vote in Italian parliament. He did, but only because one opposition party abstained in order to avoid to minimize turmoil. In the vote, Berlusconi fell 8 votes short of a majority and the opposition immediately asked him to step down.

The euro initially fell on signs of defiance from the long-time Italian leader but it shot to session highs after he told Italian President Napolitano he will resign once austerity measures are passed. The opposition has yet to respond but the market is now expecting the austerity to pass, followed by elections early in the new year.

Greek politicians continue to drag their heels on selecting a new PM and the main opposition party refused to sign a pledge to implement the troika-mandated reforms. A local news service reported that former ECB member Papademos has been offered the job as leader and an announcement could come within hours.

The euro and overall risk sentiment are at risk of a breakdown in Italy or Greece. The Italian bond market also remains in crisis mode with 10-years hitting a fresh record 6.78% although that should come down when the market re-opens and reacts to Berlusconi's offer to quit.

Asia-Pacific Preview

The market-moving event of the session comes at 21:00 EST - 02:00 GMT when China will release the October CPI report. The consensus is 5.4% but government officials hinted at 5.5% earlier in the week after a 6.1% y/y rise in September. Indications from China suggest leaders are comfortable with some continued modest tightening early next year but no changes in 2011. Given that, it would take a significant miss (+/- 0.4%) to spark a lasting market reaction.

The calendar is nearly bare with Australian consumer confidence from Westpac at 2330 as a lone highlight. The RBA rate cut should boost sentiment further after a 0.4% gain last month. Twenty minutes later Japans current account data will be released. At 0030, Australian September housing finance is expected 1.8%.

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