Italian Stocks Wake Up to Political Drama as Snap Vote Called

(Bloomberg) --

With U.S.-China trade tensions still roiling global equities, another reliable source of market drama returned to the fore: Italian politics.

The latest chain of market events remained consistent with moves that follow every wave of Italian headlines: the country’s sovereign yield spread over Germany’s surged to the most since July, an index of Italian banks plunged to a three-year low and the benchmark FTSE MIB Index lost as much as 2%.

For stocks, it was a bit of a delayed reaction: While bonds started falling Thursday, shares remained relatively calm -- until Friday.

The political sequence of events is a little harder to predict. While Deputy Prime Minister Matteo Salvini of the anti-immigration League has called for a snap election amid a deepening rift with his coalition partners, Prime Minister Giuseppe Conte has signaled he won’t leave office without a fight. This offers some hope to those who fear a vote in the fall will disrupt budget negotiations with the European Union.

The latest events are “a reminder that political uncertainty remains a significant tail risk for the markets,” said Emmanuel Cau, head of European equity strategy at Barclays Plc. “The key sources of risks related to trade war, Brexit and Italian politics are not going away, and along with the softening in economic growth, call for tactical caution.”

Also calling for investors to be on guard, Citigroup Inc. analysts led by Mauro Baragiola recommended Italy’s quality stocks -- or as they put it, “cosmopolitan companies incidentally bearing an Italian passport,” such as Moncler SpA and Technogym SpA.

Italy’s budget showdown with the EU repeatedly shook European markets last year as the country delivered a fiscal plan breaching the bloc’s rules. But the nation’s troubles were starting to fade this year as risk appetite returned and it avoided punishment over its budget deficit. Still, with economic growth remaining sluggish and Italian leaders calling for aggressive tax cuts, the country’s 2020 plans threaten another repeat of last year’s drama.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Paul Jarvis, Tom Lavell

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