The Italian Job

Even since the release of Federal Reserve's January meeting minutes showing a few members' concerns of the long term consequences of QE, the stock market had acquired a downward bias. However, none of the subsequent trading days have showed such panic as today's closing hour. For the day, S&P 500 was down 1.8% and the volatility index rose 34%. The reason for such panic was attributed to election results in Italy. Here is a Reuters report explaining it.

The center-left coalition led by Pier Luigi Bersani won the lower house by around 125,000 votes and claimed the most seats in the Senate but was short of the majority in the upper house that it would need to govern.

Neither Grillo, a comedian-turned-politician who previously ruled out any alliance with another party, nor Silvio Berlusconi's center-right bloc, which threatened to challenge the close tally, showed any immediate willingness to negotiate.

World financial markets reacted nervously to the prospect of a government stalemate in the euro zone's third-largest economy with memories still fresh of the financial crisis that took the 17-member currency bloc to the brink of collapse in 2011.

Grillo's surge in the final weeks of the campaign threw the race open, with hundreds of thousands turning up at his rallies to hear him lay into targets ranging from corrupt politicians and bankers to German Chancellor Angela Merkel.

In just three years, his 5-Star Movement, heavily backed by a frustrated generation of young Italians increasingly shut out from permanent full-time jobs, has grown from a marginal group to one of the most talked about political forces in Europe.

Berlusconi's campaign, mixing sweeping tax cut pledges with relentless attacks on Monti and Merkel, echoed many of the themes pushed by Grillo and underlined the increasingly angry mood of the Italian electorate.

It has always been a worry for the market that how long the citizens of Europe's peripheral nations will accept the yoke of austerity. Regardless of how Italian election finally shapes up, the expanding influence of this anti-austerity block can not be denied. Mr. Grillo, who is the leader of the anti-austerity movement, wants Italy to hold a referendum to decide whether it should stay in the Euro zone. Of course, we are a long way from Italy leaving the Euro zone. But the existence of such a possibility has given the market a strong reason for pause.