Italy’s uncertain election result sent a shiver through global markets, but the Australian sharemarket finished a volatile session off the day’s lows as investors wagered domestic large cap stocks would be insulated from any fallout in credit markets.
The S&P-ASX opened 1.5 per cent down after the US S&P 500 registered its biggest loss for the year, tumbling 1.8 per cent on heavy volume, but domestic investors again bought into the dip in the major banks and large cap miners, paring the loss to 0.46 per cent mid-session.
Comments from Reserve Bank deputy governor Guy Debelle stoked demand for yield but selling returned in the afternoon as the Australian dollar weakened, leaving the benchmark index down 52.2 points, or 1.03 per cent, at 5003.6 points at the close.
Dr Debelle said the Reserve retained scope to lower rates to counterbalance the strong Australian dollar, “should the need arise”.
The dollar initially eased just 0.2¢ to $1.0280 as the US dollar staged a broad rally against most currencies except the yen, while government 10-year bond yields tumbled 11.2 points to a one-month low of 3.393 per cent, but the dollar later extended losses to $US1.0265.
The yen soared almost 5 per cent against the euro as Japanese investors bailed out of eurozone risk assets last night following news that disgraced former Italian Prime Minister Silvio Berlusconi had won enough votes for a hung parliament.
Technocrat Prime Minister Mario Monti was lagging in a distant fourth place and analysts fear no ruling coalition will be formed, necessitating another vote.
Mr Berlusconi had campaigned on an anti-austerity platform, and in order for the European Central Bank to live up to its pledge to do “whatever it takes” to cap Italian borrowing costs, a new Italian government would have to agree to undertake fiscal reforms.
“It thus may be ungovernable and creates a sudden descent back into uncertainty over the future of the economic policy direction in Italy and the willingness of the ECB to use its OMT (market intervention) to support the Italian bond market,” Royal Bank of Scotland currency strategist Greg Gibbs said.
“We should recall that apart from the Italian election uncertainty, the Spanish government is embroiled in a graft scandal. The French economy has become weaker threatening political stability. And the US is struggling with its fiscal uncertainty. There is certainly are enough factors to generate a significant further correction in global equities,” he said.
In Tokyo the Nikkei index fell 2.2 per cent while the Shanghai composite index was up 0.3 per cent at the close of the ASX.
Yesterday spot iron ore continued to weaken, sliding 1.8 per cent to $US151.90.
The broader All Ordinaries index was down 50.9 points, or 1.0 per cent, at 5,021.8. On the ASX 24, the March share price index futures contract was 58 points down at 4,984 with 32,133 contracts traded.
CMC Markets trader Ben Taylor said the Italian election results suggested reforms put in place under Prime Minister Mario Monto were now considered unlikely to continue in their current form, causing investors to sell stocks.
Mr Taylor any sell-off was limited due to local economic factors such as low interest rates.
"After suffering a 1.5 per cent loss in morning trade our equity market has fought back half of its losses exhibiting the recent strength of the current uptrend,” Mr Taylor said.
"While many traders have been looking for reasons to take profits, the market’s inherent strength has met any pullback with swift bidding support as low interest rates continue to see cash pour in from the side line.
"If the uptrend remains intact, we are likely to see previous gains added to over the next month."
Australia’s four major banks all finished in negative territory.
ANZ dipped 31 cents to $28.16, Commonwealth Bank lost 28 cents to $65.47, National Australia Bank eased 33 cents to $29.95 and Westpac ended 14 cents lower at $30.23.
The big miners also ended the day weaker.
BHP Billiton fell 55 cents to $36.35, Rio Tinto slumped 58 cents to $65.57 and Fortescue was down 14 cents at $4.61.
Gold was the only sector on the market to rise, climbing 1.34 per cent according to IRESS data.
At 1.30pmthe spot price of gold in Sydney was $US1591.20 per fine ounce, up $US5.05 from Monday’s local close at $US1586.15 per ounce.
Making news, Seven Group Holdings said first half net profit came in $256.8 million, up from $52.1 million in the previous corresponding period.
The stock rose 46 cents, or 4.58 per cent, to $10.51.QBE fell 28 cents, or 2.15 per cent, to $12.75 after the insurance giant said net profit grew by eight per cent in calendar 2012 to $US761 million ($A743.27 million).
It also flagged staff cuts to save at least $US250 million ($A244.18 million) a year until the end of 2015.
National turnover was 1.91 billion securities worth $5.11 billion, with 356 stocks up, 621 down and 372 unchanged.