Italian Political Concerns Weigh on International Markets

U.S. stock markets gave up early gains and were deep in red territory by closing time on Wall Street. Grabbing headlines were the results of the Italian election, which initially fueled market optimism, but that sentiment had reversed by afternoon trading.

What’s important:

One of the primary fears that international investors have is Italian political gridlock. Premiers in the country require control of both houses of parliament, otherwise passing legislation is nearly impossible. If control of both houses is not established in this election, an interim government — like the one currently in place under Mario Monti — would be set up to facilitate another vote.

“A hung parliament would be a guarantee of paralysis both in terms of economic program and structural reforms,” Annalisa Piazza, a fixed-income analyst at Newedge Group in London, said in an e-mail to Bloomberg. “Such a scenario would be the worst-case outlook.”

But what’s important for international investors is pretty much the opposite of what many Italians care about. The austerity measures that were put in place under Monti’s leadership are tremendously unpopular with Silvio Berlusconi’s conservative bloc, which preliminary data shows could lead the senate. Meanwhile, polls indicate that the center-left will win the lower house, yielding an unfavorable split in power…