He expects a muted response from European bond markets but cautions there may be consequences down the road if the authorities fail to take the need for reform seriously.
Political uncertainty is business as usual for Italy, so we think European bond markets are likely to respond pragmatically to the lack of an outright winner in the Italian election held on Sunday (March 4, 2018).
We now expect either a grand coalition of Italy’s political parties to emerge or a technocrat administration to take the reins of government.
In either case, it’s likely take a few days for a resolution. But in the meantime, we expect the response of European bond markets to be fairly sanguine.
If no resolution is forthcoming, it’s possible that the Italian authorities might demand another vote, but in our travels in Italy recently, we’ve detected no enthusiasm for further elections.
An election outcome in which there is no clear decision is pretty standard for Italy, judging by recent history.
Reform Off the Agenda?
Any talk of political, structural or fiscal reform is likely to evaporate; none of Italy’s major political parties had campaigned for reform in their manifestos after the referendum defeat and subsequent resignation of former Prime Minister Matteo Renzi.
Longer term, inertia may re-emerge as a challenge for Italy as we think some reform is required. However, in the short-term, we think markets will be relieved that the country is not facing the prospect of a center-right coalition, as campaign pledges pointed to more spending and higher debt.
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The iShares MSCI Italy Index ETF (EWI) was unchanged in premarket trading Tuesday. Year-to-date, EWI has gained 3.22%, versus a 2.00% rise in the benchmark S&P 500 index during the same period.
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