Just when we thought Greece was finally starting to play ball in the campaign to prevent the demise of Eurozone, Italy has stepped in to take its place as the problem child of Europe. Italian 10 year bond yields soared above 7% yesterday and at the time of writing, showed no sign of abating their upward spiral. It seems that despite Berlusconi’s announcement of his intention to resign, the markets are still suspicious of Italy’s ability to repay the debt, particularly in the short term.

The bubbling concerns over Italy were exacerbated yesterday when one clearing house demanded increased margins for trading Italian debt, fearing that they won’t be repaid. This has caused ripples across global stock markets, as the optimism from two days ago has quickly turned negative again yesterday.

Italy is in many ways a greater concern than Greece, as in global economic terms, Italy is regarded as a much more developed nation than Greece and therefore, a much bigger player to be in the mess that she seemingly finds herself in.

Attention naturally turns to that other centre of European concern, Spain and whilst their respective 10 year bond yields have rose slightly yesterday, they do at least appear to be trading within margins, suggesting that they may have a better grip on their economic troubles.

What does this mean for portfolios? Well, commodities have led the way so far this week, with the oil price rising significantly two days ago. Yesterday’s setback has caused a little of that gain to fall off, but there is no doubt that both gold and oil continue to be the assets of choice for worried investors, particularly when we consider the political challenges in the Middle East as well.

Despite fluctuations in Government bond yields, default rates in corporate debt still seem exaggerated and assuming that geographic exposure is well managed, fixed interest seems a sensible place to have some portfolio exposure.

If there is one area that we are glad to have minimal exposure to at the moment, it is the banking sector. There have been so many false dawns over the past few years about the sustainability of the banks and their return to profits, but on days when stock markets fall, the banks across the UK and Germany fall by typically 4-5% on average. To us, whilst there may be the odd exception within it, the sector just does not make a sound investment case at the moment.

With all of this in mind, one can only imagine what China and the Developing World are making of our economic struggles.