Italian government crisis? Not a big deal…
Head of Macroeconomic Research
Summary: Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis.
Market reaction to Italy’s Prime Minister resignation has rather been quiet. Yesterday, Italy-Germany government bond spread was moving lower, around 200 bps, and there was no sign of contagion to other PIIGS countries. Saxo model of periphery weighted spread to Germany (which is GDP weighted) was also down, at 177 bps, close to the lowest levels reached this year.
Investors seem to believe that, in a central bank world, political risk does not matter as long as it is not linked to EZ/EU membership. On the top of that, expectations of further ECB stimulus in September, which could consist in a new QE package coupled with lower deposit rate, is also pushing down interest rates.
Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis:
1/ A grand coalition that could gather the PD and the M5S with potential participation of Forza Italia (this scenario, that was quite unlikely a few days ago, has been intensively discussed since yesterday). It would be the most market-friendly option and it seems to be supported by the European Commission ahead of budget discussion.
Market impact: LOW. Italy-Germany gov. bond spread around current level, at 200 bps.
2/ A caretaker government whose main objectives would be to pass 2020 budget and implement more tightening in order to be in line with the European Commission’s deficit target. At first, it looks more market-friendly than the previous option, but this government is unlikely to last long. New elections would need to take place next year. This option would be a form of “extend and pretend”.
Market impact: VERY POSITIVE (at first). Italy-Germany gov. bond spread below 200 bps.
3/ Snap elections in Q4 2019. This option implies an elevated risk that Salvini could be in a position to form a right-wing coalition, which would increase tensions with the EU and other European governments, notably France.
Market impact: NEGATIVE. Italy-Germany gov. bond spread back to 300 bps.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.