20180305-法国巴黎银行-The_Italian_election_outcome_Results_and_market_implications_23页_1mb

Summary of the Italian Election Outcome and Market Implications

Core Content

The Italian general election on 4 March 2018 resulted in a hung parliament, with no single party or coalition securing an absolute majority. This outcome reflects a significant shift in political power, with anti-establishment parties emerging as the dominant force. The Five Star Movement (M5S) and The League (L) together captured around 50% of the votes, indicating a strong performance by these parties at the expense of mainstream political groups.

Key Political Results

• Vote Share: The League received the most votes among coalitions, while M5S was the largest single party.
• Regional Performance:
  • The League performed well in northern regions, likely due to immigration concerns.
  • M5S gained more than expected in the south, attributed to economic underperformance in that region.
• Mainstream Parties:
  • Forza Italia (Berlusconi's party) and the Democratic Party (Pd) performed poorly.
• Government Formation:
  • A coalition between M5S and the League is politically challenging but not ruled out.
  • A grand coalition between Pd and Forza Italia is unlikely.
  • A technocrat government or government of national unity is a potential fallback, but would be unstable and likely lead to a new election within two years.

Market Implications

• Uncertainty: The market faces high uncertainty due to the unclear path to government formation.
• Economic Outlook:
  • Italy is outperforming the eurozone in growth and fiscal improvements.
  • The primary budget surplus is around 1.5% of GDP, and debt roll-over is supported by lower interest rates.
• Credit Bonds:
  • Credit bonds are under pressure with outflows in high-yield segments.
  • The BTP-Bund spread is expected to widen only slightly, as domestic investors are cash-rich and short duration, while non-residents remain underweight in BTPs.
• FX Market:
  • The EUR has seen reduced long positions, with EURCHF being a more attractive trade due to potential Swiss intervention.
  • The FX political risk indicator has increased, suggesting a muted reaction to the election due to pre-priced risk premiums.
• Equities:
  • Italian equities have underperformed due to concerns about fiscal policy and political instability.
  • Midcaps are more resilient due to domestic holdings from the PIR program.
  • A reflation trade is unlikely to support equities due to limited fiscal flexibility.

Main Concerns for Markets

• Euro-scepticism: M5S and the League have reduced their euro-sceptic rhetoric, but the message remains.
• Economic Reforms: Both parties may seek to reconsider past reforms, potentially leading to conflict with Brussels.
• Political Uncertainty: The formation of a government could take 4-6 weeks, but a longer process is possible.
• Credit Risk: European IG CDS spreads are wide relative to cash spreads, suggesting potential outperformance of CDS ahead of the roll date.

Key Figures and Projections

• Preliminary seat projections indicate a hung parliament with no major bloc securing a majority.
• BTP-Bund spread is currently 6bp wider than Friday's level and is expected to widen only to 155-160bp.
• FX Positions:
  • Long EURUSD and EURCHF have been scaled back.
  • EURCHF is targeted for a recovery to 1.18, with a target of 1.20 and stop-loss at 1.1420.

Conclusion

The Italian election has led to political fragmentation, with anti-establishment parties dominating. While this could lead to economic policy shifts, the market's reaction has been relatively calm, likely due to pre-priced risk premiums. The formation of a government remains uncertain, and market participants are closely watching for developments. The economic fundamentals suggest improvement, but political risks and policy uncertainty continue to pressure asset prices.