Earlier in the day the market consensus was for Italy’s Bersani to win and we saw this optimism expressed in the FTSE MIB Index (Italy’s primary equity market index), which was up over 600 points, and Italy’s 10-year yield which was lower by more than 27 bps around 9:30am ET. However, the markets euphoria quickly turned pessimistic when headlines crossed the wires that Berlusconi, not Bersani, was leading the Senate race in Italy. As a result Italian equities plunged, yields soared and the Euro began a rather sharp descent. That said, these market reverberations were felt not only in Italy, but worldwide – It should be noted that the Italian election has still not produced any official results yet.
We saw many today wondering what lead to such a sharp sell-off in the U.S. markets, almost in disbelief that the Italian elections could have such an impact. To break this down in one of its simplest forms, here’s an intraday overlay between EUR/USD and S&P500 March futures1 since midnight, and as you can see the two moved in nearly lock-step to one another (Correlation = 0.9697). Furthermore, it appeared the Euro was slightly leading U.S. indices throughout much of today’s NY trading session. Now, this doesn’t guarantee if EUR/USD continues to head lower over the coming days that S&P5001 must trade lower as well (or vice versa), but it does suggest this should be the relationship between the two.
Turning to the charts, the EUR/USD did some major technical damage today as it failed into the 50-day sma (1.3310), then broke through the 100-day sma (1.3120) as well as the key convergence zone highlighted below around 1.3085/65 – Daily 144 & 169 EMA’s & 38.2% retracement of the rally from July 2012 lows. Below present levels sees two key technical points to watch: 1.3030 (bottom of the daily Ichimoku Cloud) & 1.3000 (psychological/barrier/option related and the 2013 low). With regards to the S&P5001, it broke below the 1495 level highlighted in last week’s TECHNICAL UPDATE, which sets the stage for a potential test of the previous Sept. 2012 highs around 1475/74 initially, and potentially 1460/59 (38.2% retracement of the rally from November) thereafter.
1 Reference is for informational purposes only and is not offered to US clients
Chart Source: Bloomberg, FOREX.com