Marc Chandler, Global Head of Currency Strategy at BBH, suggests that it is going to be the start of the next phase in Italian politics, which since the election in early March has not been much of a market factor.
“Indeed, the Italian equity market is the best performing within the G7 this month, losing a little less than 1%. Italian bank shares have declined by 3.9% this month. They fell by nearly 1.6% in February. However, it seems to be simply paring the out-sized 13.3% rise in January.”
“In the middle of next week, Italy’s President Mattarella will begin consulting with party leaders to see if a majority government can be formed. There are four key players here. The center-left PD, who’s leader, Renzi, insisted that it goes into opposition have a horrific showing in the polls before resigning. The center-right accounts for two of the players Berlusconi’s Forza Italia and the Northern League (Salvini). The Northern League edged out Forza Italia by four percentage points and so its ostensibly the senior party in the coalition. The Five Star Movement (M5S) won a plurality of votes, but not a majority.”
“There are a few more wrinkles in the plot. First, due to a tax fraud conviction, Berlusconi cannot serve hold office until 2019. Second, Berlusconi had campaigned only force that could stop the populist M5S. This further strains ties between the two camps. Third, Salvini of the Northern League has stuck with Berlusconi and is resisting M5S from pulling them apart. Fourth, Berlusconi and Salvini are opposed to the head of the M5S, Di Maio, from becoming the next premier, which he seems to believe he is entitled to as the head of the party with the most votes.”
“Next week will be a month since the Italian election. While the situation seems fluid and it may be premature to reach any strong conclusions, the outlook is not particularly encouraging.”
“The election was held under new rules that had ostensibly been designed to facilitate more sturdy governments. If Mattarella finds that after several weeks, a stable coalition remains elusive, a technocrat government could be put into place that would seek to modify the election rules again and go back to the polls. This might ultimately be in the PD and Berlusconi’s interest. It might allow the PD to regroup and maybe even recover the left flank that split from it last year. If the next election is deferred sufficiently, Berlusconi’s ambition can be exercised again. The M5S thinks that it has the momentum. Northern League’s Salvini was quoted in the press as saying it there was a 50/50 chance of a new election.”