FTSE 100 climbs 1 on corporate news but Berlusconi remains under threat

The FTSE 100 closed higher by 1% after positive corporate news from a number of firms, but with Silvio Berlusconi losing his majority in the Italian Parliament in today’s 2010 Budget Review vote, his position remains under considerable threat and Italian bond yields rose further as a result, keeping traders somewhat on edge.

Today’s session has been a tale of two key themes: positive earnings and the political fragility in Italy.

Positive earnings from Vodafone, Marks and Spencer’s and Lloyds Banking Group were enough to entice investors into the market today and this helped to lift the FTSE 100 by 1%. Vodafone upgraded their guidance on the year whilst in the same breath hiked their interim dividend, delighting shareholders in the market and being a bellwether stock, this also helped to improve earnings sentiment in the broader market. M&S shares also saw a bounce, having reported figures that marginally beat expectations whilst Lloyds Banking Group, who posted a loss for the quarter of £607 million, also saw higher share demand from investors.

However, headlines out of Italy continue to dominate proceedings and whilst stocks were not weighed down heavily by the clear fragile hold on power that Berlusconi exerts at present, we did see investors cash in their gains early after it emerged that Berlusconi had lost his majority in Parliament with today’s budget vote. In the vote, Berlusconi won with 308 votes out of 630, meaning that he had lost his majority due to a high number of dissenters in his own party.

The budget vote passed, though this was not a case whereby it passed with broad support but rather it stumbled across the line due to the high opposition abstentions in the vote, which by effect weakened Berlusconi’s position but helped to pass through the budget review at the same time.

Focus will now switch by investors as to what Berlusconi’s next move will be. Either he will call a confidence vote to try to reaffirm his grip on power, call elections or attempt to power ahead despite his clear weak position now as the Italian PM.

The markets need to see a strong and united political system in Italy, which will help to breed confidence that the indebted country can implement the vital austerity plans needed to contain its debt crisis. With Berlusconi losing his majority, a stronger government may now only come from a new election or at the very least a resignation of Berlusconi himself. It is muted investor optimism that we could be witnessing the final days of Berlusconi’s tenure as PM which is helping to keep stocks supported in what can only be described as a crucial period for Italy and the Euro zone.

At the same time, Italian 10yr bond yields continue to race towards the important 7% level which triggered bailouts for Portugal, Greece and Ireland, keeping the pressure on Italy to solve its political turmoil. So this tells a tale of a sharp loss of investor confidence in Italy’s fragile political system and it is becoming increasingly clear that perhaps investors are pinning their hopes on a new PM and government to take on the debt fight.

Investors will likely keep their eye on developments out of Rome and any speculation concerning Berlusconi’s next move will likely trigger knee jerk reactions in the stock markets.