Silvio Berlusconi’s return to Italian politics raises fears that the progress in lowering sovereign debt yields will be reversed.

Italy’s unelected Prime Minister Mario Monti announced on Saturday that he would resign early, after Silvio Berlusconi’s return to Italian politics meant that Monti no longer had the support of the Berlusconi-led, People of Liberty Party.  As an unelected technocrat who was installed as Prime Minister by President Giorgio Napolitano after Berlusconi’s resignation in November of 2011, Monti was never able to enjoy popular support.  Although his austerity measures helped lower the nation’s sovereign debt yield, they also expanded unemployment   Monti never had the popular support necessary to introduce the degree of structural reforms necessary to increase the nation’s economic growth.  His mission was limited to reducing the national debt and budget deficits.  Although his term would have lasted only until April, Monti opted to leave office once his political base of support had been undermined by Berlusconi.

Silvio Berlucsoni saw an opening as the public became fed up with an austerity program which was seen as serving the interests of Germany at Italy’s expense.  Berlusconi is playing the role of an anti-austerity crusader who nevertheless intends to keep Italy on the Euro.  His potential opponents include former comedian Beppe Grillo of the 5 Star party and Pier Luigi Bersani of the Democratic Party.  Berlusconi’s vast media holdings provide him with an advantage in “rebranding” himself from convicted felon (presently appealing his conviction for tax evasion) and winning over support from a recession-weary public.  Monday Market Movement – Monti’s Move Makes Mess in Europe

Prime Minister Monti’s resignation and the possibility of Berlusconi’s return as Italian Prime Minister initially raised fears that the major European stock indices would crash and bond yields across the Eurozone would spike.  By the time the markets opened on Monday, the anxiety had settled to the point where only Italy faced a yield spike and a stock market swoon.  By the close of Monday’s trading session, Italy’s FTSE MIB Index took a 2.20 percent nosedive to 15,354 and the nation’s ten-year bond yield spiked to 4.84 percent from Friday’s closing level of 4.55 percent – the highest jump in four months.  Mario Monti held a press conference in Oslo, Norway on Monday Morning, at which time he attempted to ease investor anxiety.  Once the 2013 budget is passed, President Napolitano will dissolve Parliament and Monti will serve as acting Prime Minister until the elections in February.

Although Berlusconi’s People of Liberty Party enjoys the support of only approximately 13 percent of Italy’s voters, the possibility of Berlusconi’s return to power raises fears of political and economic chaos among investors.  His characterization of the European Union’s pro-austerity budget policy as “German-centric” has raised fears that his argument could gain traction in Spain, Greece and other countries in the Eurozone periphery, possibly undermining the future of the euro.   Spain’s ten-year bond yield increased by 10 basis points on Monday to 5.55 percent, causing many to wonder if Berlusconi was to blame.  Probable versus Possible

We will be watching the performance of the following ETFs during the course of Italy’s 2013 election campaign:

iShares MSCI Italy Index ETF (NYSEARCA:EWI)  -1.75%  Learn More About iShares ETFs

Vanguard MSCI Europe ETF (NYSEARCA:VGK)  +0.27%

iShares MSCI Spain Index ETF (NYSEARCA:EWP)  -0.63%

SPDR EURO STOXX 50 ETF (NYSEARCA:FEZ)  -0.12%

CurrencyShares Euro Trust ETF (NYSEARCA:FXE)  +0.10%

Bottom line:  Although Silvio Berlusconi’s return to Italian politics has not negatively impacted stock prices or bond yields outside of Italy as of this time, concern remains that as the Italian election campaign continues, Berlusconi’s rhetoric could undermine cooperation from the Eurozone’s peripheral countries in cooperating with the European Union’s economic austerity requirements.

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About John Nyaradi (http://www.wallstreetsectorselector.com) John Nyaradi is Publisher of Wall Street Sector Selector: Your Home For ETF Investing! John writes a weekly guest column, John Nyaradi’s ETF Edge for MarketWatch.com and his investment articles have appeared in many online publications including Trading Markets, Money Show, Yahoo Finance, Investors Insight, Fidelity, ETF Daily News, iStock Analyst , among many others. His book, Super Sectors: How to Outsmart the Market Using Sector Rotation and ETFs, is published by John Wiley and Sons and included among the Years Top Investment Books in the 2011 Stock Trader’s Almanac.