Italian Election Sparked Risk Aversion, Euro Tumbled, Yen Soared

Concerns over results of Italy's election triggered massive risk selloff overnight which in turn send euro sharply lower, yen sharply higher. Exit polls showed that former Italian prime minister Berlusconi had a strong showing in projections, which could eventually result in a hung parliament. Front runner Bersani would won a marginal majority in the lower house getting 340 seats over total of 630. However, projection showed that Berlusconi could win a blocking minority in the upper house, getting 120 seats over 315. Majority in both houses is required for the government and the failure to form a coalition could threaten economic reforms in Italy and subsequently reignite the Eurozone debt crisis. And a hung parliament is considered the worst case scenario by analysts as that would paralyze the ongoing economic program and structure reforms. Full election results are expected by morning Italy time.

Technically, EUR/USD is dived to as low as 1.3041 so far today and is threatening to taken on important psychological level at 1.3. EUR/GBP's break of 0.8604 support overnight all indicates short term reversal which would likely send the cross to 0.8446 support and below. EUR/CHF also dived to as low as 1.2118 and is threatening to go back below 1.21. Meanwhile, the sharp declines in yen crosses worth the biggest attention too. As mentioned in our weekly report, the failure to ride on G20 earlier this month to extend its downtrend argues then yen has bottomed out at least in near term. Yesterday's sharp fall did indicate near term reversal and the weak GBP/JPY has taken the lead and broke 139.25 support level. EUR/JPY is set to challenge 117.40 key support level.

Another key development to note was the sharp selloff in US stocks overnight. DOW edged to new high of 14081 but reversed and closed sharply lower at 13784, down -216 pts. S&P 500 also closed sharply lower by -27.75 pts at 1487.85. So far, 14000 in DOW and 1500 in S&P prove to be difficult to overcome. We have been warning of reversal in stocks for some time in our weeklies and yesterday's selloff could be the turning point. Now with 1495.02 near term support broken, a short term top is at least formed at 1530.94 in S&P 500 and we'd likely see the index fall back to 1400 level. More importantly, while it's still to early to confirm, stocks might be reversing the medium term trend just ahead of historical high of 1576.09. So traders are strongly advised to lighten up their positions on recoveries.