Political Impasse In Italy Raises Alarm Bells; Stocks, Banks And Euro Dive Off A Cliff

Ishaq Siddiqi, market strategist at ETX Capital, looks at what the Italian election results means for a troubled Euro zone.

Share markets and bank stocks in Europe are sliding as investor sentiment is rattled by the political impasse in the Italian elections. The centre-left coalition led by Bersani is to take control of the lower house, winning in a tight race against Berlusconi’s coalition. But, there is no absolute majority in the Senate, leaving Italy in a political deadlock.

Italians have clearly voted against austerity judging by this outcome with a lack of confidence in former PM Monti and divided between the centre-left and centre-right. The uncertainty over this outcome kicked stocks on Wall Street lower overnight with Asian markets following suit. European stock markets are reacting accordingly while the euro is around the 1.30 level against the dollar. Italy’s FTSEMIB has been halted due to the selling pressure while European bank stocks are taking a hammering.

Peripheral bond yields, particularly Italy’s 10-year and 5-year are reaching for the ceiling again and we have an Italian T-bills auction later in the session which is likely to see investors express their lack of confidence in Italian paper. What is more worrying for investors is that the political deadlock in Italy would suggest that even if we do see a market-friendly scenario materialise with a reform-minded government taking control, the fact that Berlusconi managed to gain such an influence with his anti-austerity campaign means that we are likely to see a rise in civil unrest in Italy.

Italy is at present ungovernable and that may be the case for some time as long as Italians are this divided on austerity. The pressure this places on peripheral bond yields will also raise the spectre of bailouts for Italy, but particularly Spain, with markets of the opinion that if the Spanish 10-year pushes above the 6% mark, this would raise alarm bells and force the hand of Rajoy’s Spanish government to request a bailout from the ECB.

Flag of Italy

Flag of Italy – FreeFoto.com

So where do Italian politicians go from here? This impasse may call for a new election but this would have to be as soon as possible as the longer the uncertainty persists, the greater the deterioration for all risk-assets. Politicians could form a broader coalition but that seems increasingly difficult due to the huge divide on policies and even if possible would raise questions over the viability and capability of such a coalition.

Finally, Bersani could call on the comedian Grillo’s Five Star Movement for extra support to rack up the numbers, but at this point Bersani appears to have lost much of his influence. So until we have greater visibility on the situation in Italy, we are at the mercy of headlines and risk is firmly off the table. Looking to today’s data agenda, eyes will be on US new home sales and Fed head Bernanke’s testimony.

By Ishaq Siddiqi, market strategist at ETX Capital

Comment Here!