The share market looks set to give back yesterday's gains plus more after signs of electoral gridlock in Italy drove US stocks sharply lower.
The March SPI 200 futures contract ended the night session 54 points or 1.1% weaker at 4988 as the S&P 500 dropped below 1,500 and the Dow lost its grip on 14,000.
The S&P 500 slumped 28 points or 1.82% to 1,488, closing at its low after Italy was left facing a second election as former Prime Minister Silvio Berlusconi appeared to secure enough votes to deny Pier Luigi Bersani an outright majority in both houses of parliament. The result threatens to derail the austerity program that put Italy's government borrowing costs back on a sustainable path. The Dow dived 217 points or 1.55% to 13,784 and the Nasdaq lost 1.45%.
"We don't want to see more chaos out of Europe," the chief investment strategist at the private-banking unit of KeyCorp in the US told Bloomberg. "Any question about whether or not Italy would be committed to austerity measures after the elections gets investors concerned."
Poll projections had Bersani's pro-austerity centre-left party on course to win Italy's lower house, but Berlusconi's anti-austerity centre-right party likely to win a majority in the upper house. Such a result would leave neither party able to form a working government and would likely lead to another election.
European markets came off their highs as the early results came in but closed before the full implications were evident. Germany's DAX held on to a gain of 1.45%, France's CAC 0.4%, Britain's FTSE 0.3% and Italy's FTSE MIB 0.73%.
Also lurking in the background in the US was an US$85 billion round of automatic government spending cuts due to come into force on Friday unless politicians reach a compromise. Economists have predicted the cuts are large enough to push the economy back into recession, if allowed to proceed in their current form.
"Sitting out there is the one thousand pound gorilla - the sequester issue - and certainly nothing is happening there," the chief investment officer of Solaris Group in the US told Reuters.
A credit downgrade for Britain and the prospect of months of uncertainty in Italy helped fuel a rally in havens, including the US dollar and precious metals. Gold secured its biggest rise of the month, recouping more than half of last week's 2.3% decline. Gold for delivery in April was lately up $20.70 or 1.3% at US$1,593.40 an ounce. Silver for March delivery rallied 52 cents or 1.9% to US$28.98 an ounce.
Oil gave up early gains as US stocks spiralled downwards. West Texas crude for April delivery was recently down 78 cents or 0.8% at US$92.34 a barrel after earlier touching US$94.46.
Copper snapped a six-session losing run in London but other metals were mixed as traders digested yesterday's Chinese manufacturing data, which pointed to slowing growth. London copper added 0.5%, tin 0.2% and zinc 0.1%. Aluminium dropped 3.2%, lead 0.5% and nickel 1.4%. US copper for March delivery was recently down 0.1% or less than a cent at US$3.53 a pound.
TRADING THEMES TODAY
WRONG-FOOTED: It's not often our market misreads the signals as badly as it did yesterday. To be fair, Asia was strong, despite China's manufacturing miss, and Italy's electoral pundits were still predicting a win for the pro-austerity centre-left. Nonetheless, last night's events point to a messy session here today. The rest of the week will depend largely on Italy's election outcome and the US's sequestration issue. The S&P 500 has now put in a lower low following a lower high, which hints at a possible change in the upward trend on global markets since early November. "Possible" is the important word here. At the least, it looks like we're entering a period of increased volatility on the indexes - not necessarily a bad thing for traders, depending on your approach. Gold and silver are likely to benefit from the increasing uncertainty.
COMPANIES REPORTING: Among the bigger names reporting earnings today are AGO, FLT, JET, QBE, RHC, SGH, SVW, TSE, VAH and WHC (source: Fairfax). A fuller list is posted here.
ECONOMIC NEWS: No significant domestic news scheduled today. Italy's election results will be the main source of interest in Europe tonight. A substantial menu in the US tonight includes testimony from Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee in Washington, consumer confidence, new home sales, Richmond Manufacturing Index and the house price index.
