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Market nerves to be tested today

09.36 AEDT, Tuesday 26 February 2013

Market nerves to be tested today
By Ric Spooner (Chief Market Analyst, CMC Markets)

At this stage, the first of this week’s major risk events looks like a clear negative for investors. The rally in share markets in recent months has been mainly about investor preparedness to pay more for stocks given perceptions of a lower global risk environment. While it’s unlikely that the Italian election result will lead to any immediate change in economic policy, it will lead to uncertainty and reduced confidence.

The Italian election results demonstrate that politicians don’t have a clear mandate for economic reform. While there is no immediate prospect of change to the pro Euro policies of the Monti government, this lack of mandate will increase the medium term political risk both for Italy and the Eurozone in the eyes of international investors. In the shorter term, the uncertainty created by the possibility of an interim government and further elections is a potential negative both for markets and for consumer and business confidence within Italy.

While the Australian market will open weaker this morning, it would take a clear move below support at 4950 to provide conclusive technical evidence that the medium term uptrend in the S&P/ASX 200 index is breaking down. Given the medium term nature of the risks from the Italian election and the possibility of positive news both from Mr Bernanke’s testimony and US budget negotiations still to come, investors may be cautious about selling too aggressively at this stage.

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