US stocks turned severely lower, with the Dow Industrials and the S&P 500 suffering their sharpest one-day decline of the year, giving benchmark indexes the biggest loss since November as political instability in Italy and looming spending cuts in the US hit investor sentiment.
Stocks erased early gains as partial election results suggested Italy may be left with a hung parliament as a strong performance by former Prime Minister Silvio Berlusconi may have given him a blocking minority to deny victory to the center-left coalition of Pier Luigi Bersani. Berlusconi’s coalition is seen as a threat to the nation’s austerity agenda while Bersani has campaigned to maintain the budget rigor of outgoing Prime Minister Mario Monti.
Stocks had pushed higher earlier on wagers Japanese Prime Minister Shinzo Abe will nominate a central bank chief who favors further monetary stimulus to haul the economy out of a 20-year long deflation.
Uncertainty over the March 1 deadline for US lawmakers to reach a deal to avoid automatic spending cuts, known as sequestration, caught investors’ attention, as a failure to reach a compromise will result in a reduced federal spending of $85 billion in the remainder of this fiscal year. Furthermore, sequestration will result in an additional $1.2 trillion in spending cuts over the next nine years.
Also, Federal Reserve Chairman Ben Bernanke is scheduled to deliver his semi-annual testimony to Congress tomorrow, which many believe, will shed light on the future of the Fed’s $85 billion a-month bond-buying program.
After surging 81 points, the Dow Jones Industrial Average (DJIA) trimmed 216 points while the S&P 500 Index (SPX) dropped 28 points to 1,488 with financials and commodities sliding the most among its 10 business sectors, all of which closed lower.
As was no surprise, Treasury prices jumped Monday, pushing 10-year yields down the most since November as prospect of a political gridlock in Italy spurred demand for safe-haven assets.
Meanwhile the euro got a spanking on Monday, slumping four percent against the Japanese yen after early results from Italy’s general elections raised doubts about the future of the country’s financial reforms.
The euro shed 1.1 percent against the US dollar and gave up earlier gains against the yen after media reports suggested a neck-and-neck race had emerged between Democratic Party leader Pier Luigi Bersani and former Prime Minister Silvio Berlusconi’s alliance.
Meanwhile, most European stocks finished higher Monday with national benchmark indexes advancing in 14 of the 18 European markets.
Italy’s benchmark FTSE MIB index climbed 0.7 percent following wild variations as investors considered various combinations of the likely outcome of the nation’s general elections.
The pan-European Stoxx Europe 600 index, however, slipped 0.1 percent to end at 288.40, after rising as much 0.7 percent and declining 0.6 percent amid conflicting reports on Italian elections.
Our Trend Tracking Indexes (TTIs) headed south but remain on the bullish side with the Domestic TTI hanging on at +2.34% while the International TTI slipped to +7.84%.