LONDON (Reuters) - Germany's months-long political deadlock is over but Italy's is just beginning. As it emerged that members of the German SPD had voted to continue their grand coalition with Angela Merkel, Italian voters were on Sunday in the process of delivering a hung parliament.
Once again the rejection of mainstream parties combined with the rise in anti-establishment forces, tinged with anti-immigrant and eurosceptic sentiment, is the driving factor. Although a rightist alliance led by ex-premier Silvio Berlusconi emerged with the biggest bloc of votes, none of Italy’s three main factions look able to rule alone.
Scenarios now include the creation of a more eurosceptic coalition, which would likely challenge EU budget restrictions and be little interested in further European integration, or swift new elections to try to break the deadlock. Winners include the anti-system 5-Star Movement, which saw its support soar to become Italy’s largest single party, and the far-right anti-immigrant League, which did better than Berlusconi’s Forza Italia. The full result should come later on Monday, but expect weeks of uncertainty now: Parliament will meet for the first time on March 23 and formal talks on forming a government won’t start till early April.
Slovakia's President Andrej Kiska on Sunday addressed the growing political crisis triggered by the as yet unresolved murder of an investigative journalist who was digging into corruption. While there has been no direct link to the government, the killing of Jan Kuciak has led to street protests by voters angry at what they see as widespread official graft. Kiska said the episode has led to a crisis of public trust in Prime Minister Robert Fico's three-party government and says there must be either personnel changes or early elections. Fico is rejecting any shake-up.
A weekend of European politics delivered some positive news from Germany, more negative news from Italy but the threat of a looming trade war remained the biggest weight on world markets.
Germany’s Social Democrats voted decisively to enter a grand coalition with Chancellor Merkel’s conservatives, leaving the pro-European SPD with key finance and foreign ministries in a new government that’s likely to take power later this month. Italy’s election outcome was a lot messier as expected, with strong showings for anti-establishment parties but no groupings looking strong enough at this stage to form a stable government.
Euro/dollar moved about 40 ticks higher to just above $1.2360 on the Germany result late on Sunday, before reversing those gains and then slipping about 40 ticks to $1.2280 this morning as the Italian results came through. Euro/yen, however, fell to a six-month low. More directly, Italy’s 10-year government bond yield jumped more than 10 basis points at one point early Monday, with the spread between Italy and Germany up 11 basis points.
The myriad permutations and combinations of outcomes of the Italian vote are still being pored over as the results come in, with markets viewing gridlock and weeks of horse-trading broadly as expected, but the chance of biggest party Five Star taking some place in a new government as negative for the both the national budget and relations with Europe.
Italy’s benchmark stock index opened down about 2 percent with euro zone blue chip stocks also lower. But much of these losses were a follow-through from Asia, where bourses fell earlier on rising fears of an international trade war after last week’s announcement by U.S. President Trump of likely U.S. trade tariffs on imported steel and aluminium.
Trump’s move, which will finally be decided on April 11, drew a sharp response from around the globe, with the European Union among others pledging retaliatory measures. Auto stocks are seen opening down 2 percent after Trump threatened European automakers with a tax on imports.
Whatever the individual company and sector impacts, investors fear an escalating tit-for-tat trade war would slow world growth and lift inflation generally. U.S. stock futures are down about 0.8 percent, with HK stocks down more than 2 percent, Seoul down more than 1 percent and Tokyo down 0.6 percent. Shanghai stocks bucked that trend, as China’s annual National Congress got underway amid pledges to keep economic growth at 6.5 percent again this year. Dollar/yen was lower, hovering just above $1.05.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own. —