U.S. stocks sell off as Italian results point to a hung election

02/25/2013 6:54 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The more you know, the worse the results of Italy’s election are.

The U.S. stock market gets it. The U.S. market, the only developed market open when Italy started to deliver meaningful election results, sold off significantly today with much of the damage coming after 1 p.m. New York time. The Dow Jones Industrial Average finished down 216 points or 1.6%. The Standard & Poor’s 500 closed down 1.8%

If the results hold up—right now they show a hung parliament n Rome—I’d expect Japan and then Europe to sell off as they open tomorrow. That would leave the New York markets confronting a wave of selling as they opened. That could well be enough to overwhelm any hesitancy New York traders feel about going short before Federal Reserve chairman Ben Bernanke’s testimony to Congress on Tuesday and Wednesday. Especially since many traders will be willing to bet that the fear of the coming sequester—due to start on March 1—would bias U.S. stocks to the downside anyway.

What do the Italian election results show now?

A narrow victory in the lower house for the center-left coalition of Pier Luigi Bersani. The last results I’ve seen give his coalition 33.63% of the votes for the lower house ahead of the 25.74% vote for Beppe Grillo’s 5 Star Movement, and 24.92% for the center-right coalition of Silvio Berlusconi.

Italy’s election laws give a bonus to whatever party or coalition wins the most votes for the lower house. So Bersani’s left-center coalition looks like it will wind up with a working majority in that house.

The rules for the Senate are different, however. There the bonus is awarded on a state-by-state basis. Berlusconi’s strength in the populous Lombardy and Veneto states with their large number of senators means his center-right coalition could wind up with enough seats to deny Bersani a majority. Bersani might be able to form an alliance with Mario Monti’s coalition, but Monti’s showing is so weak that he may not get the 8% vote required to win any seats in some states. It’s hard to see how Bersani could form a government with Berlusconi and Grillo’s Five Star Movement has said it will not enter a coalition with any of the major parties.

All this could mean a new election with no guarantee that a re-vote would produce a government either.

The Five Star Movement has emerged from the election as Italy’s largest party: Bersani and Berlusconi’s coalitions gained more votes but they are both groupings of parties rather than a single party as Five Star is.

The emergence of the Five Star Movement is almost as big a headache for the other members of the EuroZone as a Berlusconi victory would have been. Grillo is committed to holding a referendum in Italy on leaving the euro and on implementing a temporary freeze on interest payments on government debt. That would be equivalent to a default.

Tomorrow should be interesting. Not necessarily in a good way, however.

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