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It was the Italian market that once again led the pan European charge lower yesterday, as it shed another 4.5% upon open. Choppy trading throughout the day saw investors try and justify buying back Italian stocks (and they do now look very cheap) but clearly the uncertainty was too much to justify doing so and in the end the bourse closed 6.2% lower than it opened at the beginning of 2013.
European stocks shared some of the burden too with even the Germans facing a 2.3% loss on the day. France and Spain fared worse though as they saw 2.7% and 3.2% losses respectively. Ratings agency Moody's has said "Italy's systemic importance to the euro area means that this week's elections have implications well beyond Italy itself and are, indirectly, credit negative for other pressured euro area sovereigns".
Meanwhile a German economic adviser to Angela Merkel takes things further by saying "the sustainability of Italian public finances is in jeopardy... The Euro crisis will therefore return shortly with a vengeance". He may well have a point; If Italians choose to move away from the reforms to date, investor confidence will diminish rapidly and Italy's borrowing costs will soar once more. The moral dilemma will then be with the ECB, who would normally buy bonds to stabilise increasing borrowing costs, but would be reluctant or unable to intervene for a country that has shunned economic reform.
Markets are likely to be patient for a few days to see what the split government can cobble together, but any sign that progress is becoming an even slower process will leave investors heading for the door and could be a "catastrophe for the euro and the European Union" according to Luxembourg's foreign minister.
Over in the US things were a little different. Ben Bernanke was a welcome diversion to Italian politics, particularly when he gave reassurances over QE staying put for the time being - "although a long period of low rates could encourage excessive risk taking and continued close attention to such developments is certainly warranted, to this point we do not see the potential costs of the increase risk taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation". The Fed Chairman was also quick to point out that he has a number of low risk options to reduce the balance sheet when they are ready to exit QE. Stock markets liked what he had to say and bought fairly enthusiastically, another welcome change from the European session.
Asia has followed the US in buying overnight and seems to be more optimistic on America than it is pessimistic over Europe. Australia are suffering a bit of a quandary at the moment in setting their interest rate policy. Ideally they would reduce their benchmark rate to soften the overly strong Aussie Dollar and boost exports, but there are fears that doing so would create an over inflated domestic housing market. Reserve bank member Roger Corbett said last night that "you don't adjust fiscal and monetary policy, in my view, to force the Dollar down because if you do that you will do enormous damage" - music to the G7's ears, but not to local businesses who are suffering big hits to their competitiveness in overseas markets. The Aussie Dollar is trading just once cent away from its five year peak versus the British Pound.
Today we get UK GDP revisions from the fourth quarter of last year, which could boost the Pound on an upward revision, though a downward revision is likely to cause a disproportionately larger fall. Later on this morning European consumer confidence is published along with economic confidence and business climate data. The US economic calendar is quite quiet but Bernanke is back on Capitol Hill, so could well move markets again.
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