Markets convulse as Italy seen on course for new elections

Bloomberg

Chaos ruled Italian markets as the nation plunged deeper into political turmoil. Yields on the nation’s two-year bonds surged to the highest in four years in holiday-thinned trading, while stocks slumped for a fourth day as President Sergio Mattarella asked economist Carlo Cottarelli to form a government. Earlier League leader Matteo Salvini said that it made no sense for Italy to remain in the European Union unless the bloc rewrote its rules.
Italian assets surged earlier in the day after Mattarella vetoed populist leaders’ choice of a euro-skeptic candidate, Paolo Savona, for finance minister. The anti-establishment Five Star Movement said it was considering proposing impeachment of the president, while League’s Salvini made a thinly veiled call for fresh elections. Analysts cautioned that any investor optimism could prove short-lived as the implications of a fresh vote were unclear.
“I am not optimistic longer out,” said Jan von Gerich, chief strategist at Nordea Bank AB. “An extreme coalition government has been blocked, and there are hopes new elections could produce something else. In the eyes of markets, there is now an alternative, but it may turn out to be false hope.”
Two-year yields doubled to 0.97 percent before being quoted at 0.81 percent, while 10-year rates climbed 6 basis points to 2.20 percent. The FTSE MIB was 2.1 percent lower on the day, and more than 10 percent down from a peak reached on May 7. Mattarella became the target of populist rage when he said he rejected their choice for finance minister for the good of the country and the financial “savings of families” that had been endangered by rising bond spreads and market concerns.
Moody’s put Italy’s credit rating on review for a possible downgrade, citing risks to its fiscal strength from the government plan put forward by the populists. Societe Generale SA says Outcome of any fresh vote looks “more threatening than ever.” Investors will therefore need to be “brave” if they want to hold 10-year BTPs at 220bp over bunds, ahead of prospect of serious challenges in autumn when fears for capital recovery may loom.
Berenberg: Sees some relief relative to the alternative that Savona would have become finance minister; it shows that checks and balances in Italy are working, according to Chief Economist Holger Schmieding. Mattarella’s decision to reject Savona, and the decision of the radical party leaders Salvini and Luigi Di Maio to not present a more suitable candidate for finance minister do carry significant risks.