European markets fall after Italian election deadlock

 

Data delayed by 15 mins 

European stock markets have fallen, with the inconclusive election result in Italy raising fears that political deadlock will delay economic reforms.

Italy's FTSE MIB index fell 4.4%, while London's FTSE 100 shed 1.3% and share markets in Frankfurt and Paris also fell by more than 1.5%.
The yield on Italian government bonds also rose sharply, implying markets are more wary of lending to Italy.
Earlier, stock markets in Asia had closed lower.
Japan's main Nikkei 225 stock index lost 2.2%, Hong Kong's Hang Seng fell 0.8% and Australia's ASX was down 1%.
Oil prices also dropped, hit by worries that uncertainty in the eurozone could hit demand, with Brent crude falling more than a dollar to $113.37 a barrel.
With all domestic votes counted in Italy's parliamentary election, the centre-left bloc won the lower house by a tiny margin, but did not secure a majority in the Senate.
Fears are that a split parliament will make it harder for one group to push through their plans to revive the economy, and that may stall Italy's process of cutting its public debt levels.
'Jump to nowhere' 

Banks were the biggest fallers on the stock markets, with shares in major banks across Europe down more than 4%.

Italy's short-term borrowing costs rose at an auction of six-month bonds, which were sold at a gross yield of 1.24%, up from 0.73% at a similar auction a month ago.
The yield on Italian 10-year government bonds rose to 4.77% from 4.48%, and the gap between the yield on Italian and German 10-year bonds widened.
Former Prime Minister Silvio Berlusconi, who has conceded the lower house to Pier Luigi Bersani's centre-left bloc, played down the significance of the spread, and said he was not worried about market reaction to the vote.
But Spanish Foreign Minister Jose Manuel Garcia-Margallo said there was "extreme concern" over possible movements in bond spreads as a reaction to the results. "This is a jump to nowhere that does not bode well either for Italy or for Europe," he said.
'Chilling message' European Commission spokesman Olivier Bailly said: "Markets are free to react the way they want.

IG's Brenda Kelly: "Election results a face-off against Brussels and Berlin."

"As far as the Commission is concerned, we would like to underline our full confidence in the Italian authorities in their capacity to find and establish a political majority that will continue to deliver a growth and jobs agenda, which is what Italy needs to reduce the unsustainable level of its debt."
Italy's public debt stood at 127% of GDP in 2012 and is expected to rise to 128% in 2013 - the second highest level in Europe after Greece.
Giuseppe Fontana, professor of monetary economics at Leeds University Business School, said Italian voters had sent a "chilling message" to the markets and policy makers.
"It is not difficult to speculate that this morning markets and policy makers are asking the big question - what is the future of the euro area?" he told the BBC.

Analysis

Nigel Cassidy Business correspondent, BBC News

Political deadlock in the Rome Senate, consternation in European capitals. The conflicting and confused messages just sent by voters in eurozone's third largest economy seem set to trigger more than the initial plunge on the Milan stock market and an overnight hike in bond yields.
It was after all only the reformist policies being pursued by Mario Monti's outgoing technocratic government which were standing between Rome and unaffordable borrowing costs. The Monti reforms were also underpinning the European Central Bank's fragile grip on monetary stability throughout the currency area.
Yet now the voters have rejected those very policies, the ECB may be forced to ride to Italy's rescue. The reality is that a weak centre-left government in Italy will find it even harder to enact the kind of reforms that stand any chance of improving productivity and competitiveness, or lifting Italy out of its seemingly endless recession.
The outcome of Italy's election is a strong signal that the euro debt crisis is far from over. For some, the only possible silver lining is that this latest popular backlash against Brussels-imposed austerity may force Germany and other EU partners to reconsider the pace of reforms.