David Roberts

Italian politics – a renewed threat to the Goldilocks scenario?

David Roberts

Today’s news that talks between Italy’s Five Star Movement and the Centre Left coalition appear to have broken down could come to trouble markets. Italian bonds have already reacted badly, having one of their worst absolute and relative days for several months.

Five Star leader Luigi Di Maio is calling for new elections and has stated his desire for a run off between his anti-establishment, left-of-centre euro-sceptic party and the decidedly right-of-centre euro-sceptic League.

Of course, the common theme here is euro-sceptic. Markets have focused on a centrist outcome, featuring the well-respected ex-prime minister Matteo Renzi, but a lurch to the left or right or, even, some ‘anti Europe and worry about the rest later’ coalition of left and right would really spook things. Neither side would claim to countenance such a move at present.

Time to be honest – for most of my career, it has been nigh on impossible to figure out Italian politics and sitting on the sidelines has often been the best strategy. At present, with Italian debt paying around 1% more than the equivalent German bond, there is no need to get involved.

That relationship is worth watching however: if it starts to move rapidly toward a 1.5% or even a 2% differential, then European equity markets and indeed the euro itself may start to wobble.

My best guess is that won’t happen but when it comes to investing, I tend to prefer a degree of certainty to guesswork. For now, we remain happy to sit on the sidelines with cash available to exploit any turmoil.

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Monday, April 30, 2018, 4:28 PM