SCOREBOARD: Italian backlash

Italy's election stalemate sent European stocks tumbling, but Wall Street lifted on Bernanke's reassuring QE talk.

Putting it mildly, some markets seem to have not responded well to Italy’s election result – which given Italy’s political history, is like freaking out because the sun rose one morning or perhaps because the rain fell one day.

You see to govern in Italy you need a majority in both houses. This almost never happens, which is why Italy has had over 60 governments since 1945. In this current election, the centre left got the lower house but not the Senate. So anyway, coalitions are the norm – sometimes huge unstable coalitions are the norm. As you can see from the number of governments they’ve had since World War II, these coalitions tend not to last long. So that there is any surprise over this election result is, well, a surprise. What did punters expect!?

Despite this fact, downside moves were huge though – Italian stocks dropped 4.9 per cent, Spanish stocks 3.2 per cent and for the core, things weren’t much better – the Dax was down 2.3 per cent, the CaC off 2.7 per cent. The FTSE100 was then down 1.3 per cent. Think that’s all? Check out Italy’s 10-year yield. It shot up about 40 bps to 4.83 per cent Spain’s yield was down about 15 bps or so though to 5.35 per cent.

Now at the moment there is no clarity on anything – the centre left are talking new elections, Berlusconi is talking bungas and after a few of those, maybe an alliance with the centre left. Anything to keep Grillo and his ‘5-star movement’ out of the way. The 5-Star runs on a platform of fighting corruption and cutting government waste and looks like they may become one of Italy’s largest parties now – or close to. That, as far as I can tell is where we are at.

So, jumping over to Wall Street it was a different world. US punters saw events in Europe and looked straight past them. Fair to say there was quite a bit of good economic news out of the US, some reassuring words from the Bernanke and positive sales results (Home Depot). Bernanke defended QE to the US Senate as one would, and argued that its benefits outweighed any costs. He also warned Congress against any severe budget cuts, which if you put two and two together – QE is awesome and don’t go cutting spending too much you crazy wacky guys – was a clear signal that the Fed will continue to monetise budget deficits. Naturally that was a huge relief given all the talk about an end to QE infinity.

Gold was a major beneficiary, shooting up another $28 as I write to be at $1614. Silver is 1.2 per cent higher and copper is 0.8 per cent higher (although crude fell 0.6 per cent o $92.5). Stocks themselves are up 0.6 per cent (to 1497) on the S&P (bit over an hour to go), the Dow is 0.9 per cent higher (13904) and the Nasdaq is up 0.5 per cent (3130). So then as to that supporting data – well US house prices rose 0.9 per cent in December according to the S&P Case-Shiller Index, to be 6.8 per cent higher annually. Elsewhere in the housing space we saw new US home sales surge 15.6 per cent in January after a 3.8 per cent fall the month prior. For consumers – confidence was up to 69.6 in February from 58.4 and finally the Richmond Fed’s manufacturing index rose to 6 from -12. All good.

For the remaining price action thee wasn’t too much of note. We saw euro little changed on a big figure (or so) range. The Australian dollar was about 40 pips lower at 1.0235, Sterling was down over 60 pips to 1.5136 , while yen did nada at 91.97. For rates, US Treasury yields were a little higher – the 10-year up 4 bps to 1.88 per cent, the 5-year was 2 bps higher to 0.764 per cent and the 2-year sits at 0.25 per cent. Aussie futures in turn did little, with the 3s at 97.26 and the 10s at 96.655.

That’s pretty much it for the session. For today the SPI suggests modest gains (0.4 per cent). Then the calendar shows Aussie data is limited to construction work done for the December quarter (at 1130 AEDT). Tonight the key data to watch includes UK GDP, a eurozone business climate indicator and finally, for the US, we get durable goods and pending home sales.

Have a great day…