On 28th December 2017, the Italian President Sergio Mattarella dissolved the country’s Parliament and called for a general election on Sunday 4th March 2018. The Italian President urged political parties to present realistic and concrete proposals during their campaigns, adding that Italian citizens should take part in the election procedure.
In October 2017, the Italian Senate and the Chamber of Deputies approved a new electoral law. The new law, known as ‘Rosatellum bis’ is a mixed system in which 37% of seats of the two houses of the Italian parliament would be allocated using a first-past-the-post voting and 63% using the proportional largest remainder method, with one round of voting. The reform was opposed by the Five Star Movement (M5S), the Democratic and Progressive Movement (MDP) and other minor parties. Polls suggest that the next Italian government will be formed of a grand coalition, including parties of the centre-right and centre-left alliances.
European Elections and Stock Markets
During 2017, Dutch, French and German citizens voted to choose their country’s next government. Political analysts had said that voters living in Eurozone’s three large economies were going to use the elections as a way to show their discontent over financial problems and immigration that has been troubling the euro-bloc in recent years.
Right wing populist parties seized the opportunity and capitalised on voters’ discontent to strengthen their positions. Investors grew worried that the surge of right-wing populism would put in jeopardy Eurozone’s future. However, their fears didn’t materialise as Angela Merkel in Germany, Mark Rutte in the Netherlands and Emmanuel Macron in France stopped the wave of populism. Especially in France, Emmanuel Macron’s victory in the first round of elections was cheered by investors with the French CAC 40 (Cotation Assistee en Continu) index hitting a nine-year high. The French stock market recorded losses after Emmanuel Macron’s victory over Marine Le Pen in the second round as investors and traders questioned his ability to deliver the promised reforms.
Impact of Italian Elections on Markets
The Italian economy is the third largest among Eurozone’s economies and the ninth largest by nominal Gross Domestic Product (GDP) in the world. Italy is the second largest manufacturer in Europe behind Germany, but its economy suffers from structural and non-structural problems. The global financial crisis hit Italy in 2009, making its GDP contract by 5.5%, worsening the country’s public finances and increasing its unemployment rate. A series of reforms and measures, including austerity packages, introduced by Italian governments put the country’s economy back on the path of growth with the GDP increasing by 1.5% in 2017, on an annualised basis, according to the National Institute for Statistics (ISTAT).
A Credit Suisse report published on 9th February 2018 said that “if Eurosceptics came to power in Italy, Italian sovereigns as well as bank stocks and bonds would suffer, and broader contagion could not be excluded. JP Morgan analysts wrote in their report, published on 24th January 2018, that “the main risk for markets is that a government is formed that includes parties who are not committed to Italy’s membership of the Euro. The economic recovery and the unemployment rate’s drop has provided an antidote to the populists’ anti-Euro rhetoric.” JP Morgan strategists believe that a period of political uncertainty would not be great news for investors, but stress that weak governments are not unusual in Italy and could be read by markets as regularity. JP Morgan’s report noted that investors could take comfort “from the fact that political uncertainty has done little to dent confidence or economic activity in other European countries, such as Germany and Spain.”
Strategists at Credit Suisse warned investors in their report that bank shares typically are weak before elections and stressed that Italian equities tend to underperform ahead of major events. Since the beginning of 2018, the FTSE MIB (Milano Indice Di Borsa), Milan’s premier listing, has surged 4.3% while Germany’s DAX-30 (Deutscher Aktienidex) slumped 3.6%. The strong performance of Italian shares is attributed to purchases of discounted bank stocks and to the improved sentiment because of positive macroeconomic data.
4th March 2018 is approaching
Investors and Eurozone’s authorities are afraid that some Italian political parties may take the opportunity to reverse structural reforms and increase spending as they promise in their election campaign agenda. However, markets seem to downplay an election shock with the Italian 10-year bond trading at a yield of 2% on Friday 16th February 2018, which is 0.5% lower than the figure recorded in March 2017. The fear of an anti-establishment government that could affect Italy’s future in the Eurozone seems to have retreated, but the hazard of increased market volatility nearer to elections is always present.
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