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Italian Election Garners Little Market Reaction

Posted by Joseph Trevisani on Mar 5, 2018 12:58:57 PM

The inconclusive result of Sunday's Italian general election was not a surprise even if the size of the anti-establishment vote was shocking. Half of Italy, on the right as well as the left, voted against the political status quo.

In Italy, as in France, Holland even Germany, opposition to the EU and the euro is rising. It is not yet a critical political mass, though it may be closer in Italy than anywhere else.  The speed of its ascent is remarkable. 

This trend should be a great concern for the European establishment, but it is not, at least in public.  In Italy a paralyzed government is more or less the norm. Paralysis is safe, it protects the status quo, but it lets problems, particularly the economy, corruption and immigration fester. In the long run it is dangerous. Inaction and stasis feed the notion that politics is dysfunctional and the opposition grows stronger.  Between 5 Star (32.5%) and the League (formerly the Northern League 17.5%) half the electorate voted against current the political structure. Many of these voters are vaguely or specifically EU and euro-skeptic and these convictions will intensify as Italy's problems remain untended.

Currency market reaction to the election was subdued. The euro climbed to 1.2365 against the dollar in early Asian trading  on Monday and fell as low as 1.2267 in Europe after closing at 1.2317 on Friday. By the New York afternoon the united currency was trading at 1.2329 barely twelve points over its open.

The currency markets are in for a period of indecision. The Federal Reserve may hint about four rate hikes but unless the economy or inflation really take off that is unlikely. Whatever President Trump is planning for trade, the threat of tariffs is a negotiating tactic. The trade discussion or dispute will continue for at least several months. That is not a background to make the Fed comfortable hastening its increases.

Similar problems exist for the European Central Bank. Economically the asset purchase program is unwarranted, but stopping it is a de facto tightening. European economies are doing better, but the main reference is what went before. They are not doing well, except perhaps Germany.  Does the ECB really want to send the euro to 1.3000 or higher against the dollar?  

The ECB is also acutely aware of politics and the trends are not favorable for the EU and its institutions.  With populism and anti-establishment politics spreading across the continent, with unemployment, especially youth unemployment high, 5 Star received one of two votes in Southern Italy, the ECB is not going to take any chances with the EMU economy. The governors will let the asset program run off in its allotted time and hope Europe's politicians can formulate a credible response to the continent’s problems.


Joseph Trevisani

Chief Market Strategist

WorldWidemarkets Online Trading

Charts: Thompson/Reuters

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