On May 29, Italian assets tumbled and BTP yields jumped on speculation Italy may hold early elections, a potential "risk event", which could have an unexpected outcome (with the Five Star party a potential dark horse factor). However, moments the project to have early elections in Italy appears to have been derailed according to a couple of Bloomberg headlines:
*ITALY MULTI-PARTY ELECTION LAW DEAL NOT VIABLE ANYMORE: FIANO
*ITALY MULTI-PARTY ELECTION LAW BILL 'DEAD': SUPERVISOR TO ANSA
As a reminder, former PM Renzi wanted to bring forward Italian elections, perhaps as early as September to coincide with Germany’s. Our Economics team say that there are other avenues to explore for this to be achieved, but this is a serious setback and it may now be improbable that they manage to make it happen.
Ironically, moments ago Goldman released a note highlighting just the risk emerging from early Italian elections:
Italy remains on the radar screen of global macro investors, for three main reasons. First, the economy has been slower to recover from the financial crisis than other large countries adopting the Euro: nominal GDP per capita is barely back at levels it stood at in 2007, compared with 20% higher in Germany and 10% higher in France. Second, smaller domestic commercial banks continue to suffer from capital shortfalls: aggregate gross non-performing loans (‘sofferenze’) stood at around 11% of total loans at the end of Q1 2017, the highest ratio since 1993-96, when Italy had just come out of a severe recession. Third, social discontent has led to increased support for anti-establishment, Eurosceptic parties: the two main ones, the 5 Star Movement and Lega Nord, together currently attract 40% of the national vote based on an average of the available opinion polls over the month of May (Exhibit 1).
# The Ruling Democratic Party and the Anti-Establishment 5 Star Movement Are Polling Neck-and-Neck
Opinion polls on voting intentions at Italy's general elections...
The market responded immediately, sending the FTSE MIB as much as 1.6% higher while the yield on 10Y BTPs sliding 10 bps to 2.20, while taking the autumn vols lower in EUR pairs...