This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
Investors are spooked. Stock prices are down, the euro is down, Italian bonds are routed, safe haven assets like gold and the Japanese yen are rising. The reason? Italian political uncertainty after the country's president, Sergio Mattarella, decided to reject the coalition’s choice of a eurosceptic finance minister.
Bank of Italy Governor Ignazio Visco has warned that the country is now just short of losing the ‘asset of trust’. Some may argue that has already happened in the markets after the yield on Italian two-year bonds broke above 2% for the first time since the European bond market crisis of 2013, with one of the biggest intraday spikes ever seen in the bond markets.
Italian politics is normally uncertain. Now it is perceived as dangerous. Concerns centre around what might happen at another Italian general election, currently looking likely to be set for either September or October.
On the face of it, Mattarella thinks he is facing down the populist Five Star Movement and League coalition after they proposed eurosceptic Paolo Savona as finance minister – a step too far for the Italian president. He feared Savona could drive Italy out of the euro, and has instead installed a technocrat professor, Carlo Cottarelli, as Prime Minister, but Cottarelli is not expected to survive a vote of no confidence, and another election will then be triggered.
Mattarella’s move could strengthen the position of Five Star and League in those elections, and they will come back in a stronger position to force through their plans. The populist parties are already framing this as an effort by the Brussels-led Italian establishment to block the will of the people. Mattarella already has limited powers, and will be weakened if Five Star and League win bigger shares of the vote with clearly Eurosceptic policies next time round.
Where next for the euro and Italian stocks?
The euro has been sharply declining for over a month now, following an impressive bull run throughout 2017. However, there are signs to say that the bullish phase could be over, with a more bearish outlook in play. Key to that is the ability to break below $1.1554 which would bring about the first long-term lower low since the start of 2017. With the price currently challenging that level, any EUR/USD trader should keep an eye out for exactly how the pair responds to it. With the long-term picture showing a bearish sell-off in the wake of a move into the confluence of trendline, 200 simple moving average (SMA), and Fibonacci resistance, the confirmation of a long-term bearish trend coming back into play would be established with a break below $1.1554.