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Italy’s vote hits European stocks

Uncertainty generated by Italy’s elections rattled global stock indexes and European bond markets for a second day yesterday, though testimony Federal Reserve Chairman Ben Bernanke and strong housing figures lifted US stocks.

A closely watched gauge of European stock market volatility hit a 2013 high after the muddy election outcome raised fresh concern about the outlook for the eurozone’s debt crisis.

Investors are fearful that the strength of the vote for anti-austerity parties will weaken efforts to reform Italy’s public finances and its labour laws, damaging the eurozone’s efforts to resolve its three-year-old debt crisis.

Markets across Europe fell on the vote results, with Italy’s FTSE MIB among the hardest hit, tumbling 4.9 per cent.

US stocks rose as Bernanke strongly defended the Fed’s bond-buying stimulus, though worries about Italy and the eurozone kept a lid on S&P 500 gains.

“Europe is just one of the things that suggest we need to temper our enthusiasm further... this (vote) this should remind us the crisis has only been in remission,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio. McCain sees further downside for stocks, including a possible correction.

The uncertainty has led to a sharp rise in volatility, with Europe’s VSTOXX index, which reflects demand for protection against a drop in major European equities, hitting a new year’s high yesterday at 24.73.

The MSCI world equity index was down 0.6 per cent, while the pan-European FTSEurofirst 300 index ended 1.4 per cent lower.

On Wall Street, the Dow Jones industrial average was up 105.39 points, or 0.76 per cent, at 13,889.56. The Standard & Poor’s 500 Index was up 6.52 points, or 0.44 per cent, at 1,494.37. The Nasdaq Composite Index was up 3.79 points, or 0.12 per cent, at 3,120.05.

Southern European government bond prices sank. Italy’s 10-year bond yields were up as much as half a point to 4.86 per cent, their highest since mid-December.

In the foreign exchange market, the euro dropped against the dollar and remained highly susceptible to further selling as political gridlock in Italy caused the government’s borrowing costs to jump.

“The bad part of the results is that there is now a ‘hung parliament’, or divided government,” said Christopher Vecchio, currency analyst at DailyFX, in New York.

The euro last traded at $1.3048, down 0.1 per cent on the day, but above $1.3017 hit during early London hours, which was its lowest since January 7.

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