Market update: Italian election deadlock brings back market jitters; negative sentiment rules

The US markets fell yesterday with continued uncertainty over the automatic spending cuts that are due on Friday. President Obama is calling for an agreement to be reached. As a result the Dow Jones and Nasdaq went down by 1.6% and 1.4% respectively. Spurred on by safe haven buying, 10 year US Treasury yields fell by 10 basis points to 1.9%, which was the lowest in a month.

The feeling of uncertainty spilled into overnight trading in Asia, where the Hang Seng closed down 1.3% and the Nikkei 225 dropped 2.3%. Europe and the UK are likely to see further drops today; at the time of writing the FTSE 100 is down 1.3% while the FTSE Eurofirst 300 has shed 1.0%. Indecision over US spending cuts and renewed uncertainty in the Eurozone after the inconclusive Italian election results are all contributing to market jitters. The fear is of an increased risk of political paralysis with Italy not being able to afford a political impasse for too long; Italian government bond yields have already risen to a three-month high. Meanwhile the contagion has spread to Spain, where bond yields are up, and the euro is down nearly 0.2%, close to a seven-week low.