The Voters In Italy Have Spoken

Includes: EWI, FXE, UDN, UUP
by: Ralph Shell

The voters in Italy have spoken, and the experts are trying to interpret the implications. Meanwhile, the markets have not liked the results of the election. The Italian stock index, the FTSE MIB, was down as much as 5%, and the Italian 10-year bond yield was up almost 40 basis points. Further, the prospect of Italian political chaos has caused a sell-off in the euro. After making a high above the 133 handle when the votes were still being counted, the EURUSD then slumped to under 13050.

Mark J. Grant in Out of the Box (per Zero Hedge), had the election interpretation:

"Basically Berlusconi represents a return to Nationalism and a repudiation of the measures imposed upon Italy by Berlin/Brussels (The European Union). Grillo represents something stronger which is a total rejection of Berlin/Brussels (The European Union) and a demand that Italy return to self-governance. Grillo's party won more votes than any other party and taken together, Berlusconi's coalition and the 5 Star Party won the vast majority of votes at just under sixty percent...I think it can now be said with a good degree of accuracy that the Italian people took a long hard look at the European Union and voted, "NO!"

If the voters are given a choice between austerity and a continuation of governance, which results in deficits, we know how the Italians vote. Austerity may please the bankers and the Northern European creditors, but it makes the people miserable.

The problem is these deficits have accumulated over time, making Italy the third largest issuer of sovereign debt in the world. The Bank of Italy reported that public debt reached a high of €1.995 trillion through September of 2012. Of this debt, €158B matures in 2013, so this and the deficit will need to be financed.

Not everyone is dissatisfied with the lower euro. The WSJ reports:

"France's industry minister Tuesday called for a lower euro and said the European Central Bank's role should be reinterpreted, wading back into a currency debate that had been calmed by an agreement between the world's top finance ministers earlier in the month to refrain from competitive devaluations of their currencies.

'I am for a less-strong euro,' Arnaud Montebourg said at a meeting with journalists in Paris, adding that it is 'good news' the euro has recently declined against other currencies...I am very happy, [the decline] should continue,' Mr. Montebourg added."

The Germans, who were instrumental in removing Berlusconi and installing Monti, actively campaigned against Berlusconi, and were unhappy with the voting result. Der Spiegel reported:

"World From Berlin: Italy's 'Childlike Refusal to Acknowledge Reality'
The Italian election, in which more than half of voters backed two comedians in the form of Silvio Berlusconi and Beppe Grillo, shows Italians are unable or unwilling to grasp the depth of their economic plight, argue German media commentators. The ungovernable nation poses a major risk to the eurozone."

That is the perspective from Germany, but austerity is not being practiced in the U.S., and look at the results. Today, the Conference Board reported that Consumer Confidence in the U.S. had gone from 58.4 to 69.6 in the last month, much better than the expected 62. New home sales were also much better than expected, 437K, up from 378K, and a report of smaller importance showed the Richmond Manufacturing Index was up to a positive 6 from the previous month's negative 12.

In Washington today, Fed Chairman Bernanke is vigorously defending his QE policies, claiming they are supporting the recovery. It appears obvious he is in favor of continuing the current $85B monthly increase in the money available for a lengthy period, and his views can be expected to prevail.

So Bernanke's continued expansion of the money supply, a stimulant to the economy, seems to be working, and in Europe, when voters have a choice, they are casting their ballot against Frau Merkel's austerity. Remember, future elections will bring future risks in Europe, but will markets continue to ignore the growing supply of dollars?

As we suggested on Friday, we thought the euro had a chance of testing the 1.30 handle. Yesterday, the EURUSD (NYSEARCA:FXE) (NYSEARCA:UUP) turned in a miserable performance. The rally above the 1.33 level and the subsequent reversal to start the week is bearish. There were rumors of big buying interest around the 1.30 handle. The market acts like it wants to test that level again.

Remember, the COT report told us the specs are still long the euro, but the total market did flip to the long side of the USD. This probably means more USD buying, perhaps against the commodity currencies, and some euro selling. At the CME yesterday, the total trade of 462K contracts, twice the open interest of 231K contracts, was quite large. Sometimes the explosive growth in trading volume signals a change in market direction, but I prefer to watch the trade to see if the 1.30 handle holds.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.