NEW YORK (BBH FX Strategy) -- Markets remained cautiously optimistic ahead of today's Italian parliamentary vote on public finances, which threatens to topple Prime Minister Silvio Berlusconi.

European stocks are rising, with the Euro Stoxx 600 rebounding (up 1.4%) from a two-day decline, after Asian shares traded defensively overnight. European bank shares are up nearly 2.0%.
Italian Premier Silvio Berlusconi

Eurozone finance ministers last night discussed details for the leveraging of the European Financial Stability Facility to 1 billion euros, now hoped to be in place in December. Both the insurance model and the SPV to attract outside investors remain on the table.

Despite the recent pressure on the EZ sovereign debt market, Greece was able to sell 26-week bills at 4.89 and the Italian 10-year yield is lower on the day. The EUR/CHF saw choppy action amid comments from the SNB's Jordan, indicating that the SNB's policy action is dependent on deflation.

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Italian politics remains in the spotlight. The Italian bond market's off-the-run 10-year yields are currently at 6.591%. The Italian government will submit a routine budget for Parliament to vote today, with Berlusconi attaching a confidence vote to a failed budgetary outcome. From there, if the government fails to reach a majority of 316 votes for a confidence vote, Berlusconi will be forced to resign his post.

Ahead of the vote, speculation about the prime minister's imminent departure is rife and markets have welcomed the prospect. In Italy's fragmented political landscape, his departure would not necessarily mean that austerity measures will pass quicker.

If the Berlusconi government falls, the first choice would likely be to see if a new coalition government can be formed with the existing parliament. This is likely to be supportive of risk appetite in the short term, but it would end quickly if a coalition could not be formed and the fall in the government were to lead to elections. This would ultimately delay the passage of the austerity measures and sap business and investor confidence even further.

Nevertheless, from here the best outcome for market sentiment in is likely to be a resignation of Berlusconi followed by the formation of a new government from the existing parliament. Looking ahead we still expect the euro to come under pressure with a short-term target near 1.3650, but we acknowledge that we could see the euro get a short term boost from today's vote with resistance expected near 1.385.

In the UK, the combination of retail and production data continues reaffirm the sluggish growth picture. The forward-looking guidance from Monday's retail sales continues to suggest that consumers are still cutting back on big-ticket items and for the most part everything non-food related. Sluggish consumer demand, after all, continues to be driven by higher taxes, a weakening labor market, and a decline in inflation-adjusted incomes.

Today we had more evidence that China is indeed entering into a phase of "selective easing." The People's Bank of China lowered the yield on its one-year bill auction from 3.584% to 3.5733%, the first easing of the auction rate since 2008. Local rates in China have already been dropping across the board. Today's move is in line with our view that despite the still somewhat hawkish rhetoric, the tightening cycle is over for most parts of the Chinese economy - with the notable exception of housing.

It is still unclear what this means for CNY, but we would not assume that the appreciation trend will stall. We think that the drivers of currency appreciation in China go well beyond short-term economic logic to include political and long-term rebalancing considerations. As such, we maintain our view that CNY will continue to appreciate at a moderate place going forward.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.