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Jeff Taylor, Invesco Perpetual

A messy bowl of spaghetti

Jeff Taylor (pictured), Head of European Equities at Invesco Perpetual, considers what happens next following an indecisive Italian election…

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.

The star of the election has been the anti-austerity, anti-establishment movement led by former comedian Beppe Grillo, which has picked up the votes of many angry, disgruntled Italians, to the detriment of the more traditional parties.

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. 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, ie a new election, is likely short term. If a coalition can be hammered out then market nerves will be soothed.

Another painful bump on the road towards Europe sorting itself, then. Ramifications for the Eurozone? Watch for a possibly softer line being taken by the EC on the pace of austerity. Watch for reactions from the European Central Bank, which is hyper-sensitive to anything which it perceives as disrupting the transmission of monetary policy. Watch also possibly for a greater chance of a country accessing the Outright Monetary Transactions: Spaniards will see their financial markets suffer in Italy’s wake through no direct fault of their own and one has to wonder whether this will nudge Prime Minister Rajoy towards taking advantage of Mario Draghi’s largesse. 

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