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The thought of Silvio Berlusconi getting back into office was enough to send the Italian stock exchange into a tailspin yesterday, as it wiped out 4.5% of it's value in the hour after polling stations closed.
The Euro also fell out of favour during commentaries that showed Silvio Berlusconi taking an early lead in the vote count. The results, we now know, are that Pier Luigi Bersani (one of the only sensible options) has won a narrow victory in the lower house, but hasn't done enough to control the Senate - which is potentially Silvio Berlusconi's. Opposing houses isn't uncommon - the US have it - but in Italy there is little previous experience of such an outcome and hopefully we will see another election, rather than trying to make this work and witnessing Italy gradually unwind its progress through permanent infighting.
On another note, Beppe Grillo got 25% of the vote. He's an anti establishment former stand-up comedian and he manages to get 25% of the voting public to feel strongly enough to check his box. Surely that says a lot more about the present state of Europe than any kind of economic indicator.
For the next couple of days European markets are likely to suffer as a result of the uncertainty. Traders didn't only vent their concerns through the Italian stock market. Germany, France and even the UK saw large sell offs on the early results. This trend could well continue as stability in the third largest economy is pivotal for European success. The fact that Italy is the world's third largest debt market is also worrying; their benchmark 10 year government bond spiked up the best part of one per cent yesterday on the uncertainty, taking it back to pre-Christmas levels, and potentially setting us back up to worry about how sustainable their debt mountain is.
Today is going to be another interesting day. Savvy investors will be sitting on their hand waiting for a more quantifiable outcome - hopefully that will be a re-election further down the line. That being the case, there may be some profit taking and reversal of yesterday's trade as people decide to capitalise on cheap stocks and currencies, or to exit from short positions and banks some profit. News from the US is house price focused this afternoon and Ben Bernanke will be in front of the Senate banking committee later in the day, which could provide a welcome diversion.
Thank you CM Trading
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