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Sunday 16 December 2018


Spring Conference

Italian markets’ reaction to election result ‘fairly restrained’

Written by Natalie Tuck

The Italian election result, which has seen anti-establishment party Five Star Movement and Eurosceptic Northern League make big gains, has had a “fairly restrained” impact on Italian markets, experts have said.

The result was described by Columbia Threadneedle Investments head of global rates and currency Adrian Hilton as “messy” but he does not think the chance of Italy leaving the Eurozone has gone up materially.

“Such a scenario would probably worsen relations with the European Commission, especially around fiscal targets. But we are a long way from Italy ditching the euro: both anti-establishment parties have toned down their euro-scepticism in recent months and surveys continue to show a popular majority in favour of membership of the single currency. The constitutional obstacles to a Brexit-style referendum in Italy are in any case considerable,” he noted.

In addition, he said the “reaction of bond markets has been fairly restrained so far; the really negative outcome for markets would be a coalition comprising both the Lega and Five Star”.

This thought was shared by Franklin Templeton Investments head of European fixed income David Zahn who said the market reaction this morning had been “measured”. However, he noted that Italian bonds have been selling off slightly due to the outcome so far, but this is the market “trying to price in the fact that things could get shaken up a bit more in Italy as these fringe parties gain more ground”.

Furthermore, Old Mutual Europe (ex UK) smaller companies fund manager Ian Ormistin said: “In terms of markets, the one-day move in the spread between 10-year Italian bonds and the benchmark German equivalent is large but nothing exceptional and the spread is still down year to date. Equity markets and companies in Italy are used to turmoil so it is unlikely that much changes as a result of the election and the upcoming uncertainty.

“Longer term, across Europe the mood continues to deteriorate amongst voters even as the economy creates jobs and incomes continue to rise. This could pose a threat at a national and a regional level, but not immediately. What we are likely to see first is more government spending and a rolling back of some of the reforms implemented since the financial crisis which will stimulate economies short term but pose challenges when the next recession arrives.”

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