Impact of Italy’s elections to be soon felt by the euro

Following last night’s inconclusive election outcome of Italy’s elections, Dean Popplewell, director of currency analysis and research at OANDA, expects some impact to be felt by the euro, with a impact on the markets ahead of the UK’s growth data released tomorrow.

“Markets dislike uncertainty. Italian bonds yields have soared and equity indexes have plummeted, as investors dump Italian debt product and flee into the safety of owning the German bund. The rejection of austerity policies by Italian voters from market darling Monti will raise doubts about the ECB’s pledge to prop up struggling Euro-economies,” he said.

Jeff Taylor, head of European Equities at Invesco Perpetual, confirmed that for international investors Italy’s election results are turning out far less clear cut than markets would have liked, with the Centre Left parties winning a clear majority in terms of seats in the Lower House of parliament but with no clear winner in the Senate.
What happens next?

“Unhappy stock markets and higher Italian bond yields are a certainty for a while, as the doubtless lengthy haggling between the political parties takes centre stage. Suggested outcomes being touted this morning include: a grand coalition between the Centre Left (Bersani) and Centre Right (Berlusconi), or a coalition between the Centre Left and Grillo’s Five Star Movement party, some of whose policies on paper at least would overlap with Bersani’s thinking,” he said.

Negotiations will be led by Italy’s outgoing president Napolitano, who played a crucial role in Berlusconi’s exit from the political scene in late 2011. Local commentators this morning are by and large less convinced that a third option, i.e. a new election, is likely short term. If a coalition can be hammered out then market nerves will be soothed.

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