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UK stock market commentary (February 26, 2013): Italian elections stuff the euro and indices

There’s a sea of red across trading screens this morning as the lack of a clear victor in the Italian elections is causing panic amongst investors. The uncertainty that this causes is enough to make anyone nervous and we are likely to see an interim administration for a number of months before fresh elections, unless a working coalition can be formed. As we well know from our own coalition here in the UK this causes little more than continual indecision and horse trading, something that the eurozone could really do without when it comes to the likes of Italy.

We have to remind ourselves why Italy is so important to the survival of the euro. Silvio Berlusconi was ousted a couple of years ago and replaced by Mario Monti the technocrat leader whose sole aim was to reform the country. This has hardly been achieved apart from the odd bit of tax tinkering here and there so Italy, with its massive debt mountain, remains a ticking time bomb at the heart of the eurozone. One thing is clear from this election and has been from others in Europe of recent is that smaller parties are eating their way into the mainstream parties’ share of the vote which means governing is more difficult without a clear winner. This means that making reforms will be far more difficult to undertake.

The result is a mass sell off of equities, in particular Italian and other banking stocks, the euro and pretty much any other risk asset you can think of. Last night the Italian election concerns caused the Dow to tumble as it posted a sharp decline and lost 216 points to 13,784. An inflammation of the eurzone debt crisis is seen as just as much of a risk for the US economy as it is for the eurozone.

The uncertainty that’s been thrown up will likely knock the Italian economy further into reverse. At the time of writing the FTSE is down by triple digits taking it to 6255 and the Dax is off 150 points. Those clients that have been holding onto their short positions will be delighted to see this move lower but the jury is still out as to whether it presents a buying opportunity or if we’ll see another leg down.

Needless to say with the Italian election stalemate situation possibly requiring another vote this has knocked the stuffing out of the single currency. In addition, there is growing rhetoric among majority contestants of an anti-austerity aftermath which seems to scares Brussels as if they don’t know ‘the political game’. Anyway, the euro plunged 158 pips yesterday to 1.3057 as political uncertainty sent participants into the safety of the US dollar. This morning there’s a little bit of life in the euro as it’s just higher to 1.3075 at the time of writing.

Gold closed at $1593.2 yesterday, up by $13.6 bucks since the end of session on Friday. The demand for the precious metal as a safe-haven asset resurged due to the political instability in Italy concerning their election stoking fears of a resurgent euro zone debt crisis. Gold's rebound of around one percent yesterday is expected to be limited by many investors due to a continuing improving global economy and concerns that the fed may slow down or stop its bond purchasing program.

Renewed worries on the sovereign debt crisis in the euro area also affected crude oil prices yesterday pushing the WTI $1.07 down to $92.13. Partial election results point to a deadlock where it could be almost impossible to govern and again the domino effect was mentioned to justify the dreadful performance for the global markets.