Italian Elections – Is Italy headed for the EU exit?


The upcoming Italian administration is keeping investors on their toes as many as the question; Is Italy headed for the EU exit? How might the Euro and other instruments be impacted by this speculation? Analyst at ADS Securities shared their opinion.

25 May, ADS Securities – The 2018 Italian elections resulted in a hung parliament that gave the jitters to investors with exposure to European stocks but also creates a new risk for the future and sustainability of the European Union. The new government is a coalition between the anti-establishment 5 Star Movement and the far-right League parties and it’s their proposed policies that could threaten Italy’s European outlook.

Who are the Five Star Movement?

This is an anti-immigration populist party that is rising through the ranks of Italian politics. Previously, Five Star was considered to be a hard-line Euro skeptic party that was looking to take Italy out of the euro! Although during his campaign Luigi Di Maio, the party’s leader, has taken a less anti-EU stance and said that he no longer believed that it was the right time for Italy to leave the Euro but will not shut the door for an eventual “Italexit“.

Italian Elections – Is Italy headed for the EU exit?

The upcoming Italian administration is keeping investors on their toes amid promises that the 5 Star Movement and the League would fight Brussels’ budget guideline, claim the control of the country’s immigration policy and ask the ECB for a debt write-off. These are all plans that fuel risks for Italy to find itself on a collision course with the EU and raise concerns on how likely an exit from the Eurozone is.

So which are the instruments that we should focus on and what will be the effect of a difficult relationship with the EU? Italian bank stocks have already been hit, yields on the country’s government debt have begun to rise again, the FTSE MIB index of leading Italian shares is down and we expect more downside as the country’s political turbulence continues.

Furthermore, if we take a look at the Euro/Dollar we can see that the increased pressure from Italy’s political uncertainty is taking its toll on the Single currency. The currency pair has dropped to 1.17 amid strong Dollar demand in recent times and ECB’s hesitation to talk about raising rates and Italy’s effect is yet to be priced in. So, if Italy becomes the new political risk for the region the Euro will come under fresh pressure and we might even see prices dropping to 1.15 as investors will grow more defensive against European politics.

Will Italy become the new Greece?

So, at a time when political risks in Europe seemed to ease, there is a new, growing concern that could quickly turn the tables. Is this the time to go short on the Euro and European stocks? Will Italy become the new Greece? It might, but the key difference here is that the Italian economy is many times the size of Greece’s domestic market and it’s currently Europe’s 3rd biggest workhorse. The mere speculation that an “Italexit” is possible would be enough to put the Euro to the test once more and this might be one of the trades to keep an eye on over the next couple of months.

ADS Securities Risk Disclaimer

This article was provided by analysts of ADS Securities.

Trading foreign exchange, foreign exchange options, foreign exchange forwards, contracts for difference, bullion and other over-the-counter products carries a high level of risk. All opinions, news, analysis, prices or other information contained in this communication are provided as general market commentary. It does not constitute investment advice. Nor a solicitation or recommendation for you to buy or sell any over-the-counter product or another financial instrument.

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