Market sentiment has shifted to risk-off
Italy’s proposed coalition collapsed over the weekend after the president refused to accept eurosceptic Paolo Savona as Minister of Finance. Markets have since reacted, with Italian government bond yields rising above their eurozone counterparts. Unsurprisingly, with the possibility of another election in the cards, market sentiment has shifted to risk-off in light of the political uncertainty.
Three questions for Italy going forward
Against the backdrop of the latest polling data, it is really hard to predict what will happen next in the political arena. The latest poll of polls shows how Lega (League) has gained popularity at the expense of Forza Italia, and that the 5-Star Movement (M5S) has lost some momentum lately. This makes it hard to predict what both Lega and M5S really want at this juncture:
- Does Lega want to capitalize on their improvement or do they want to hold out in the hopes of being able to challenge M5S for the top spot?
- Does M5S really want new elections, given they would have to change every candidate (or change their bylaws)?
- And finally, what will the official return of Silvio Berlusconi mean now that he is again allowed to run for office?
We don’t have answers to these questions. Only time will tell.
Looking over the longer term—What could happen next?
What happens over the next year or two will determine not only what Italy’s relationship with the eurozone and its institutions will be, but it will also determine whether or not current market pricing provides investors with a potential opportunity.
With this in mind, we’ve are keeping a close eye on the following topics:
Eurozone membership
We continue to believe that risk to Italy’s membership in the eurozone is limited. The euro still has the support of roughly 60% of Italians, and both Lega and M5S have noticeably toned down their euro-skepticism. Even more, President Sergio Mattarella is clearly trying to protect Italy against anti-euro moves.
