Euro falters, FTSE MIB index falls and bond market widens after Italian general election

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There was no clear winner in the initial results (Source: Getty)

Markets are waking up this morning to uncertainty over the political situation in Italy, after a general election resulted in no clear winner and a surge of populist sentiment.

The Euro fell below $1.23 earlier this morning, though the currency has remained relatively unchanged as results have been announced.

According to an exit poll, which has so far been borne out by preliminary results, the populist Five Star Movement looks to be the biggest party. But a right-wing coalition led by Silvio Berlusconi's Forza Italia and far-right party The League will gain the most seats.

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The results are likely to lead to weeks of negotiations between parties. With Eurosceptic parties including the League and the Five Star Movement set to get around the negotiating table, European investors showed signs of jitters this morning.

Italy's FTSE MIB opened down over one per cent. Meanwhile the spread between Italian and German bonds was up by 10 points, indicating that investors are pricing in a higher potential of a breakup of the European Union.

"We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets," commented Matteo Ramenghi of UBS's chief investment office.

"A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline. Repeat elections could prolong uncertainty and weigh on Italian assets.

The Italian equity market has not priced in electoral uncertainty, but current yields on government bonds suggest they have incorporate some political risk.

Despite the uncertainty in Italy, other European markets opened up. The FTSE 100 had climbed by over 17 points to 7,087 at the time of writing.

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