Markets dive on inconclusive Italian election; Wall Street offers support from better than expected data

<p>Markets across Europe tumbled on Tuesday following inconclusive results from the much anticipated Italian elections. Renewed fears surfaced surrounding the eurozone crisis as Europe’s third […]</p>

Markets across Europe tumbled on Tuesday following inconclusive results from the much anticipated Italian elections. Renewed fears surfaced surrounding the eurozone crisis as Europe’s third largest debtor became stuck in a political deadlock which threatens to blow it off the reform path.

By mid-afternoon the FTSE was trading down 1.3%, the DAX was down 1.5% whilst the Italian FTSE MIB has slumped over 3.7%. Yields on the Italian 10-year bond also rose from 4.48% to 4.87%, the highest level since October 2012, highlighting the market dislike for uncertainty.

Italy’s borrowing costs had come down in recent months, aided by the promise of support by the European Central Bank. However the election has confirmed the fears of both investors and other European countries that Italy would not produces a government strong enough to implement the key reforms needed.

The banking sector was the most severely affected across Europe. In Italy banking stocks were initially limit down and then when they did begin trading, dropped between 7% – 10%. In the UK Barclays topped the loser board, tumbling over 4.8% by mid afternoon. Royal Bank of Scotland and Lloyds also dropped 4.1% and 3.3% respectively. On the positive side Randgold Resources proved to be popular as investors headed towards the relative safety of precious metals, even though Goldman Sachs lowered its three-month forecast for gold to 1615 per ounce from 1825.

That said, negative sentiment was capped by a positive start on Wall Street following better than expected US housing and consumer confidence data. The house price index rose by 6.8% year on year, the best annual gain in seven years, whilst new home sales jumped by 15.6% month on month in January. Consumer confidence also gained more than forecast as rising home values and gains in employment seem to be brightening attitudes across the pond despite the higher payroll tax to which Americans are adjusting.

As the afternoon progresses investors will be keeping a very close eye on any developments in Italy and any signs of a coalition being formed. The two options left from the inconclusive elections are either:

1) to form a grand coalition between Bersani‘s centre left, technocrat Monti’s centrists and Berlusconi’s centre-right or
2) the implementation of another technocrat government temporarily and await new elections. Either way the election has rung alarm bells of uncertainty across Europe and investors have fled risky assets in the near term as a result.

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