The Overnight Report: L'Italia Vacilla
By Greg Peel
The Dow fell 216 points, or 1.6%, while the S&P lost 1.8% to 1487 and the Nasdaq dropped 1.4%.
Italy teeters. It would seem that if you are supporter of Italian centre left candidate Pier Luigi Bersani you get in to vote early, and if you are a Berlusconi supporter you have a couple of drinks and then hit the polls late. Heading into election, the preferred possible result was a strong showing for Bersani and enough support for former technocrat prime minister Mario Monti to provide for a workable coalition, with Berlusconi left on the outer and the final candidate ? the comedian ? little more than a joke.
As European stock markets moved towards their closing bells last night it did indeed look like Bersani was the front runner, in which case the reforms, budget cuts and austerity measures put in place by Monti and applauded across the world would not be threatened. The UK and German stock markets closed up over 1% and the Italian market gained 0.7%. But as darkness fell in Rome the count began to swing in a different direction.
On latest figures, Bersani and Berlusconi are neck and neck with the comedian a close third. Monti has fallen away. The Italians have voted against austerity, with Berlusconi successfully driving a wedge on a platform of reversing many of the austerity measures put in place. Given all three other candidates declared pre-election that they would not form a coalition with Berlusconi, it seems at this point that Italy will have to do it all again next month. Just as Greece did last year.
Last year Wall Street rallied strongly right up to the Greek election and crashed immediately after. There has been plenty of warning of a stalemate Italian election, so go figure. On Friday the Dow was up over 100 points and was up 80 points last night before turning. So the intraday fall is really 300 points.
The euro has fallen 1.2% and it was left to the stock markets in New York to reflect the late election developments. The US dollar index is up 0.4% to 81.79 and gold has gained US$12.90 to US$1593.60/oz. The US ten-year bond rate, which had been consolidating around 2% for some time, fell 7bps to 1.90%. The VIX volatility index jumped 28%.
Base metals were mixed in London and closed well before the Italian election result turned. The oils were little changed. Unaffected by Italy, the Chinese spot iron ore price has fallen US$1.70 to US$151.90/t.
The Australian market was kicking along (blindly?) as per usual yesterday when around lunchtime the HSBC flash estimate of China's February manufacturing PMI came out. At 50.4, the flash figure represents a worrisome drop to only slight expansion from January's more comforting 52.3. The Aussie immediately dropped half a cent and stocks arrested their run.
I would be ignoring the February number, flash or otherwise. Chinese New Year fell in February and every year we go through the same routine ? strong Chinese economic data going into the week-long holiday, weak economic data in the month of the holiday, and a bounce-back subsequently once everyone's back at work. To get any sort of realistic picture we need to average the three months of before, during and after, in which case I'd be waiting for the March result before I decide whether there's anything wrong with China's recovery.
As to Italy, well we just don't know at this stage. Italy has been forced to endure tenuous coalition governments since Garibaldi was a lad. No other candidate is prepared, supposedly, to co-ally with Berlusconi. If a forced second election sees Berlusconi improve his position, then what happens next is anyone's guess. It's not just a matter of the lower house but of the upper house split as well. It took weeks before a government emerged in Greece. If the eurozone is not prepared to let Greece go, it's hardly likely to show the door to Italy.
On the other hand, stock market traders are lovin' it. The chorus has been chanting "give me a pullback so I can buy". The Fed couldn't do it, can Italy do it? The dreaded sequester approaches on Friday, with no resolution forthcoming. Maybe we will see stocks lower from here, but as to how much lower depends on just how far antsy buyers will let it fall.
The SPI Overnight fell 54 points, or 1.1%. If that indication rings true, the ASX 200 will be testing 5000 again today.
Meanwhile, we'll see results from Atlas Iron ((AGO)), James Hardie ((JHX)), Oil Search ((OSH)), QBE ((QBE)) and Transfield ((TSE)).