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It Was All About European Politics

05 March 2018 by lberuti

Italy has had around 90 governments since 1900. Neither stability nor certainty has ever been the main feature of Italian politics. No one was expecting anything else than a hung parliament (a party needs 40% of the votes to avoid that) to come out of Sunday’s elections, but no one was expecting both populist parties - Five Stars and the League - to claim the right to lead the next government. The League gathering more votes (17.6%) than Forza Italia (14.1%) took everyone by surprise, and makes the centre-right look more anti-immigration and euro sceptic. Furthermore, the grand coalition between Forza Italia and the Democratic Party (which gathered 18.8% of the votes) that some had hoped for is also off the agenda as the combined share of the votes of these two is falling short of the 40% threshold. That led to a negative open in Europe. But then investors remembered that even Euro sceptic parties had softened their stance on euro exit before the elections, which, combined with the agreement of the SPD to join the CDU-CSU to form a new coalition in Germany, triggered some profit taking on short risk positions. It pushed credit indices risk premia to tighter levels compared with Friday in a straight line. At the end of the day, the only evidence that the results of the Italian elections were worse than many had thought was the underperformance of Itraxx Main in Europe compared with CDX IG in the US.