Germany probably balanced everything out.
That’s from Swissquote’s Peter Rosenstreich and it sums up the situation in Europe on Monday.
Last week, markets were a bit nervous about the fact that the Italian election came on the same day as the results from the SPD vote to support a new coalition with Angela Merkel in Germany. The consensus was that although the vote in Italy obviously has long-term ramifications, the near-term risk was that SPD would vote “no” leading to more political turmoil in Europe’s most important economy. Instead, they voted “yes”, and that’s what matters on Monday.
Populist parties were of course ascendant in Italy, but the vote was inconclusive (as expected) and now everyone will brace for a lengthy period of political wrangling. Here’s Goldman:
The official result of the Italian general election is yet to be announced [but] the latest electoral projections suggest that no major party or electoral coalition will win an absolute majority of seats in the Lower House and Senate. We expect a bumpy and potentially long period before a new government is in place. In the meantime, the current government will remain as a caretaker. The formation of a new government will come only after a period of negotiations among all political forces. New elections, perhaps in a year’s time, could also be a possibility. In our view, the inconclusive Italian vote has negative “medium-term” implications for stability in the Euro area and thus for markets. Even though the prospect of a caretaker government could diffuse tensions for now, the Italian vote suggests little appetite for economic policies that would keep the Italian fiscal deficit under the 3 percent Maastricht limit, for example. This will create tension between Italy and its European partners.
So while everyone sorts this mess out, they’ll likely be some downward pressure on Italian assets but again, the stabilization of German politics looks like it’s going to carry the day in terms of broader sentiment in Europe. Here’s the DAX, the EuroStoxx 50 and the MIB:
Obviously the Italian banks are getting crushed:
The euro was whipsawed, rising and then diving to an intraday low of 1.2269:
For now, the market mood seems to be something akin to “fuck it, we’ll worry about this later” and you can’t really blame everyone. There are more pressing concerns.
Here’s Bloomberg with a rundown of some of the analyst commentary on Italy…
- The election outcome will bring uncertainty which could weigh on Italian assets, Credit Suisse strategist Pierre Bose writes in note. However, there’s seem to be another sword of Damocles above Italian equities, which is a global trade war. “Italian equities would be at risk if the looming U.S. trade threat escalates. Italy’s considerable trade with the U.S. in automobiles, consumer discretionary and food products could be hit if a trade war were to materialize.”
JPMORGAN ASSET MANAGEMENT
- The results were partly in line with expectations, while some surprises with potential implications for markets emerged, market strategist Maria Paola Toschi says in interview. “The market reaction was very muted this morning, with the BTP showing a moderate move.” The reasons may partly be due to some aspects of the outcome already being incorporated by investors such as low governability, no majority and the need for additional consultation/coalitions. Still, “the extreme scenario of a populist government seems a remote possibility, which is good for markets.”
- Italian weakness today finds “a more solid support” in Europe where the SPD vote can open a positive evolution for an increased integration under a French/German drive, according to the brokerage; highlights a possible “sharp correction” that could hit mainly banks, insurance and asset gatherers through the potential increase of the Italian 10-year sovereign spread up to 200bps on the German Bund
- “Banks are the ones suffering the most due to the domestic exposure and the growing uncertainty related to the lack of visibility on the future government,” managing director Luca Rubini says in interview. “Uncertainty means lower growth so Popolari banks in particular, but also Intesa and UniCredit, which are exposed to the economic cycle, may suffer due to instability.”
AXA IM ITALIA
- While the baseline scenario hasn’t changed from before the vote, there is now a higher probability of a tail risk of a non- conventional majority, Chief Investment Officer Alessandro Tentori says in an interview. The overall market reaction “isn’t that bad,” though markets are probably taking “a little bit of time to try and understand.” He noted that “in no country in the euro zone is the nexus between the sovereign and the banking sector is as strong as in Italy,” so political events “transmit naturally to the sector.” “It’s may be premature to turn negative on the banking sector as a whole” as fundamentals have improved.
- “Anti-establishment parties did better much better than expected, something which should not be taken positively by the market,” CEO Jacopo Ceccatelli says in interview. He sees “a mild negative reaction” with some weakness and volatility, though would be surprised “if huge or very significant.”
- Equity strategist Mislav Matejka writes in note: “Italy remains our top country pick, and we would use any politics-driven softness as an opportunity to add.”
- “With no absolute majority emerging, the parties have the option of negotiating a coalition -— an uncertain process,” economist Daniele Antonucci says in note. “Policy continuity looks likely while this happens, but limited reforms could leave the economy vulnerable when the cycle turns.”
- The biggest surprise was the stronger-than-expected results of anti-establishment Five Star and Lega, “something that is unlikely to please the market and EU partners,” analysts Javier Suarez and Andrea Filtri wrote in a note. They expect some short-term volatility with defensive sectors (utilities & infrastructure, consumers & towers) outperforming high beta/pro- cyclicals sector (banks and industrials)
- “We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets,” Matteo Ramenghi, chief investment officer at UBS Group’s wealth management unit in Italy, says in a note. A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline while repeat elections could prolong uncertainty and weigh on Italian assets. He added that the Italian equity market hasn’t priced in electoral uncertainty, though current yields on government bonds suggest they have incorporate some political risk.
- Populist parties performed strongly, while no single coalition seems able to reach a majority, chief strategist Jan von Gerich says in note. Financial markets are expected “to show some worries but no bigger panic ahead.” The chances of Five Star and the League forming a government are “remote, so market worries should be only limited for now.” The positive cyclical momentum in the economy and continued ECB support “act as a buffer.” Confirmation of a grand coalition government from Germany is positive for financial markets and diminishes the net market impact. Still, expects to see some worries especially in Italian government bond markets and equity markets.”
- Germany probably “balanced everything out,” says Peter Rosenstreich, head of market strategy at Swissquote Bank. “My concern was that we would wake up and see chaos in Europe, with a negative vote in Germany, a vote in Italy in which the Five Star had come out even stronger — that really would have thrown everything into chaos.” Sees European economy continuing to improve despite Italy “hiccups;” Trump announcement on trade tariffs more of a concern.