Feeling Italy’s euro pain

Instability shifts economic fallout to global markets

AUSTRALIAN investors are feeling the pain from political uncertainty in Italy and the possible economic fallout for the battered eurozone.

The Australian share market and Aussie dollar copped a battering yesterday following big falls in the US and across Europe, with the financial sector faring worst.

Overnight Wednesday Wall Street’s Dow Jones and S&P 500 dropped 1.6 and 1.2 per cent respectively and major European markets were down more than 1 per cent, with Italy the biggest loser, finishing 2.65 per cent lower.

Fears that Italy will have to hold another round of elections after attempts to form a functional government failed have unnerved investors and stoked worries about eurozone stability.

Investors are worried that the next election, possibly in July, could lead to an anti-Euro government and put further pressure on a eurozone that is still grappling with Britain’s exit from the European Union.

Patersons Securities economic strategist Tony Farnham says “geopolitical dramas” are expected to linger until there is clarity over Italy’s future.

“We’ve got at this particular point in time an Italian situation, which is going to get worse, I think, before it gets better,” Mr Farnham said.

Italy is the third-largest economy in the eurozone behind Germany and France and Mr Farnham said populist sentiments are, rightly or wrongly, that Italy can do better outside the EU.

“The populist parties could potentially get an even larger vote at the next election if people continue to sell the story that they’re being driven more by what’s happening in Brussels and less by what’s happening in Rome,” he said.

Relations between the US and North Korea are also a concern. The S&P/ASX200 fell below 6000 points yesterday, hitting a one-month low of 5983 points, with heavier falls in Asia.

The Australian dollar fell to a two-week low of 74.76 cents as investors fled to the safe-haven greenback and treasury bonds.

Future local market movements will be dictated by news out of Italy, global economic data and US trade talks with China, Mr Farnham said.

Australian investors will also be keeping an eye out for company trading updates before the end of the financial year.