Italian elections are a key event for European markets, Pimco warns

Italian elections will be the key event for the coming week for European markets, according to Nicola Mai, sovereign credit analyst at Pimco.

With just a few hours to go before the publication of the first polls, Pimco expects the election to be close, but continue to expect Bersani to win a majority in the Lower House, and to form a post-election alliance with Mario Monti to command a majority in the Senate.

“The biggest risk is a hung parliament, which could occur if Bersani or (much less likely) Berlusconi had a majority in the Lower House, but no one commanded a majority in the Senate. Such an outcome would likely lead to new elections within a few months. The tail risk is that Berlusconi wins an outright majority in both houses. But the probability of this happening looks very low, as Berlusconi’s performance would not only need to be very strong, but also broad-based across large regions,” Mai said.

At the moment, the market appears to agree with Pimco on the likely outcome of the election, with not much risk premium of a negative outcome priced in the Italian sovereign bond market.

“If our and the market’s expectations prove correct, the elimination of tail risks will likely lead to a near-term rally in Italian sovereigns next week,” he said.

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