Timothy Graf, head of macro strategy for EMEA at State Street Global Markets; Antoine Lesné, head of EMEA strategy and research for SPDR ETFs; and Elliot Hentov, head of policy and research – official institutions for EMEA at State Street Global Advisors, offer their views on the Italian general election results…
Graf says: “After 2017 ultimately proved benign for Eurozone political risk, the unexpected strong performance of the Five Star Movement (M5S) brings these threats very much back to the forefront. Though M5S officials have toned down anti-euro rhetoric in recent months, the euro-scepticism within the bloc could ultimately re-introduce the existential threat to Eurozone stability long thought diminished. Forming a government has many challenges, but this result could dent the strong consensus support the euro currently enjoys. Italian bond spreads also have scope to widen modestly from current levels.”
Lesné says: “Political risk is back roaring. Italy was always going to be the country where some of the Eurozone construction issues would be the most acute. Despite the recent toning down of anti-euro rhetoric, this is a blow to the strong consensus that the common currency has been enjoying of late. It may still be too soon to expand into another full blown Eurozone crisis and the market will have to analyse the impact of this election on actual reforms. But the word is out and Italian treasury spreads (Buoni del Tesoro Poliennali, BTP) will widen from current levels while the euro strength could be halted until more clarity comes to light. This may also inevitably reverberate onto other euro assets at least until the market focuses on the next important European event this week, namely the European Central Bank.”
Hentov says: “The Italian status quo – political inertia in the face of economic decline – is simply not sustainable in the long-term and Italian voters are restless. It remains to be seen whether the Five Star Movement can actually lead a government as any other constellation looks unfeasible. The fact that a majority of votes went to parties outside of the mainstream is likely to be a warning for markets that Italy’s and Europe’s core challenges remain unresolved. All roads lead to Rome, at least when it comes to boosting the Eurozone’s viability, and markets will take note that euro assets need to reflect more than just the relatively buoyant economy. On the contrary, it is increasingly clear that the Eurozone drama is far from over, even if we may be enjoying the current intermission.”
