Market Drivers: Italian Elections, Volatility Returns, Earnings Recap

Silvio Berlusconi

Silvio Berlusconi (Photo credit: Wikipedia)

Even after an early week sell-off, the rally of 2013 is once again moving forward. The DJIA in striking distance of reaching a new all-time high, having  added almost 1,000 points, or just under 7.5% YTD.  Here are three drivers that have moved the market this week:

Italian Elections


On Monday afternoon the Italian elections were the clear catalyst moving markets. Reports that the Italian elections would result in a hung parliament caused sharp selling through the afternoon and into the closing bell (to the tune of a 214 pt loss to the DJIA). The European press was fairly united on Tuesday in its anguish over the results, with commentators saying it threatened to make the country “ungovernable”, with political gridlock. The big surprise of the vote was the astonishing vote haul (24%) of comic-turned-political leader Beppe Grillo, whose 5 Star Movement has capitalized on a wave of voter disgust with the ruling political class. With billionaire Silvi Berlusconi back in the game and no party gaining a clear majority, politicians in Rome have already began the difficult talks needed to form a government which, if it can be done at all, will likely take some time. The unfortunate downside is that most scenarios were viewed as leading to a weak government with a  political vacuum in Italy for some time to come.

Is Volatility Coming Back?

As I mentioned in last week’s Weekly Drivers, “any shakeup in the US, or Global economy could certainly serve as a catalyst to send the VIX skyrocketing again.” Well we got both! The market’s reaction to the FOMC minutes, coupled with the previously mentioned Italian elections shot the VIX back to more “normal” levels with the index reaching as high as 19.28 on 2/25. So relatively speaking, how big was Monday’s pop? The 34% spike in the VIX makes it the eleventh largest one-day spike in the 24 years of VIX historical data going back to 1990.  (Feb. 27, 2007 holds the record for biggest VIX pop ever). Following the surge on Monday however, the index has started to drift lower again.  Keep in mind,  given the amount of uncertainty and catalysts lurking in the coming weeks, volatility is capable of resurfacing at any moment.

Earnings Recap

Earnings continue to be top of mind for traders and investors. Of the 466 S&P 500 companies that have reported earnings 74% (349) have beat estimates while 24% (114) have missed the mark. This marks a slight improvement over the 69% that have beat, on average, over the past four quarters. According to the data, Q4 earnings for S&P 500 companies are estimated to have risen 6.2 percent, above a 1.9 percent forecast at the start of the earnings season. Going forward, it could be difficult for companies to continue at this pace. In a report published by FactSet's John Butters on Friday he notes “since the end of the fourth quarter (December 31), analysts have reduced earnings growth expectations for Q1 2013 (to -0.2% from 2.4%) and Q2 2013 (to 5.0% from 6.5%.)" Without continued earnings growth, some say the market could be considered fully valued, and primed for a pullback.

*Weekly Bonus

Scrap metal anyone? In late January the Soviet cruise ship, MV Lyubov Orlova was being towed from Canada to a scrap yard in the Carribbean when a cable snapped setting it adrift in international waters. When regaining control of the wayward ship proved to be too dangerous, it was left to drift unattended in the North Atlantic. Authorities across several countries are diligently watching weather patterns to see where the lost ship may end up, and whose responsibility it will be. There is also concern that the derelict 295’ ship could end up in shipping lanes or possibly damage offshore installations. Latest reports show the potential for a beaching off the coast of Norway, while others see it heading toward Iceland.

Read more about the issues, debates, trends and other forces helping to shape the markets.

M/V Lyubov Orlova in Neko Harbour, Antarctica

M/V Lyubov Orlova in Neko Harbour, Antarctica (Photo credit: Wikipedia)