Mib: What the markets are watching with the Italian legislative elections

(BFM Bourse) – The Italians are called to the polls this Sunday for legislative elections which, for the time being, do not really worry investors. But the market will be attentive to the tone adopted on the reforms and the budget by the forces that will make up the future government.

Italy has a strong taste for political instability. In”>a note from May 2018, Natixis even considered that it was a “national sport”. 1972, about forty governments succeeded each other and less than 10 lasted more than a year and a half.

Mario Draghi is also about to hand over. “His departure deprives Italy of an unparalleled level of competence and vision”, judge the economists of Oddo BHF. The President of the Italian Council had resigned in July, paving the way for the legislative elections which are therefore organized this Sunday, September 25. If the vote only takes place on one day, the Italians could wait days or even weeks to know the identity of the government succeeding that of “Super Mario”.

Historically, the formation of a new Italian executive takes between 24 days and 89 days after the vote, notes Barclays, even if the British bank estimates that the urgency of the situation – in particular the preparation of the budget for 2023 – should push for go down that range.

The spread as a great barometer

As is often the case, several active people will be on the lookout for Monday, the day after the results of this election. “The measurement of the risk due to the result of the Italian elections on the market will be done via three barometers. The first and the main one will be the spread, that is to say the difference in rates between Italian and German sovereign bonds at 10 years. The euro could possibly react, even if it is influenced by many other factors. Finally, it will be necessary to monitor the equity markets, in particular the Italian banks”, develops Vincent Juvyns, strategist Europe at JPMorgan Asset Management.

If the previous elections, in particular that of spring 2018 which had resulted in a right-wing coalition deemed eurosceptic, could give cold sweats to the market, this is for the moment much less the case. The yield on 10-year Italian bonds exceeded the 4% mark during this month for the first time since 2013. But a similar movement took place on the debts of other countries in the euro zone. So much so that the spread between the 10-year debt of Italy (the BTP) and that of Germany (the Bund) remained rather stable during the summer, notes Goldman Sachs.

“For the moment there is no great stress on Italian rates linked to the upcoming election but the context remains feverish”, judge for his part Vincent Juvyns.

“Although lower than in past crises, the BTP-Bund spread is at a worrying level”, decide for their part the economists of Oddo BHF. “This reflects a double uncertainty, first on the decisions of the next Italian government (possible divisions within the coalition), and on the resolution of the European Central Bank to use the TPI [“Transmission Protection Instrument”, un outil dont la BCE s’est dotée pour lutter contre la fragmentation monétaire, c’est-à-dire la divergence des conditions de financement dans la zone euro, NDLR] in the event of much more marked stress”, he judges.

Giorgia Meloni in pole position

The polls stopped since the beginning of the month gave a clear lead and a clear majority to a bloc of three right-wing parties. This coalition would be formed by Fratelli d’Italia (Brothers of Italy), which is led by Giorgia Meloni, the Northern League and Forza Italia, the party founded by Silvio Berlusconi.

“Fratelli d’Italia largely dominates its two allies” which should propel “Giorgia Meloni to the position of Chairman of the Board”, estimates Oddo BHF. “Although his party has its far-right roots and a Eurosceptic leaning, the views expressed during the campaign were not radical,” considers the financial intermediary.

Giorgia Meloni “benefits from the disarray of the population, of companies, in the face of rising energy prices”, adds Denis Delespaul, president of the France-Italy Chamber of Commerce and Industry, interviewed on Friday on BFM Business. The latter says he is “sure” that the political leader “will put a little water in her wine” if she comes to power.

According to the economists at Oddo BHF, the right-wing coalition “seems ready to enroll its action in following Draghi without having the credibility”.

Barclays estimates that in the event that this three-party formation comes to power, the BTP-Bund spread should not experience any significant movement insofar as this is the result expected by market players.

The serious budget will be rigorous

It will nevertheless be necessary to monitor the tone adopted by the winners of the election – whoever they are – vis-à-vis their relationship with the European Union and on budgetary issues when the country’s debt is around 150 % of its GDP. “In an environment of rising rates, the question of debt sustainability may arise”, judge Oddo BHF.

“Italy’s financial situation remains unclear, in a context of general interest rate hikes. However, the country benefits from the funds of the European recovery plan NexGenerationEU which finances structural investments, in return for reforms in the productive sector and measures taken to accelerate the energy transition”, recalls Vincent Juvyns.

“The future government will therefore have to strive to pursue structural reforms, as the Draghi government did, and show serious budgetary measures at the risk, otherwise, of offending the market and increasing the spread of the Italian debt”, he concludes.

It remains to be seen how investors will react in the coming days. Goldman Sachs recalls that the FTSE MIB, the main equity index of the Milan Stock Exchange, has in the past reached peaks of volatility during the weeks following the legislative elections.

Julien Marion – ©2022 BFM Bourse

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