Italy's stock market dives on prospect of new elections

Italy's main stockmarket gauge, the FTSE Mibtel, has fallen into the red for the year, amid concerns that the country is headed towards fresh elections, which some observers believe might turn into a 'de facto' referendum on the country's membership of the euro.

Triggering the move, at the weekend President Sergio Mattarella shot down the appointment of a prominent Eurosceptic as Finance minister, leading to the resignation of the just recently chosen Prime Minister, Giuseppe Conte.

To replace Conte, and in a bid to defend the country's economic stability, Mattarella chose former International Monetary Fund director Carlo Cottarelli, who was known in Italy as 'Mr Scissors' for his cuts to public spending under previous governments in Rome, as temporary PM until new elections are held.

Worth noting, that led to calls from the main anti-establishment party, the Five Star, for the impeachment of Mattarella.

"I could not accept a minister who threatens to exit the euro," Mattarella told a news conference.

"I have done everything in my power so that a political government was born, but I could not accept an Economy Minister who threatened Italy's membership of the euro, which I consider essential for the future of the country," he explained.

"I have accepted all the ministers," said Mattarella, "but if we have to discuss this (the exit from the euro), we will do it openly, it is not an issue that was discussed during the electoral campaign."

So now, after almost three months without a government, all eyes were turning to an upcoming confidence vote on Cottarelli in Parliament, which would determine whether he would be able to approve a 2019 Budget law, with elections then set to follow on July 29 or August 5, La7 local television channel reported.

In case of a failed confidence vote - which analysts at Unicredit Bank said was the most likely scenario - Cottarelli would resign and the country would be headed back to the ballot box after August.

But above all, and amid the continuing rise of populist parties in the country, experts were now weighing the potential implications of a hypothetical exit by Italy from the euro.

Commenting on the latest developments in the euro area's third-largest economy, Holger Schmieding at Berenberg said: "Could Italy trigger a new euro crisis? Probably not. A radical government in Rome - or the fear thereof ahead of new elections - could plunge Italy into a deep crisis with significant financial and economic spillovers to its neighbours.

"Although countries with close links to Italy would be severely affected for a while, it would still be an Italian rather than a “euro“ crisis. In an unlikely worst-case scenario, Italy may go bankrupt, leave the euro and face a prolonged period of chaos. Beyond losing big Italy, the euro itself would not be at risk, though. Just like Brexit strengthened pro-EU sentiment across the EU-27, a hypothetical messy Italexit would likely make other countries more rather than less eager to stay in the euro."

Just over three weeks ago, the FTSE MIB had been ahead by over 12% for the year-to-date and the top performer from among the Continent's main equity benchmarks.

But by Monday, it was slipping into the minus column as the yield on the benchmark Italian two-year bond jumped by a massive 155 basis points to 2.45% - in a clear sign of investor nervousness.

Indeed, were it not because the yield on the country's 10-year debt was higher by 42 basis points at 3.10% on Tuesday, Italy's interest rate curve would have already 'inverted', another poor omen for the economy.

Versus similarly-dated German 10-year bunds, the yield spread was hitting 284 basis points, up from 232 on Monday.

To take into account, as David Madden, market analyst at CMC Markets UK pointed out: "Opinion polls suggest the Five Star Movement and Lega party would gain more ground as populist sentiment is still growing. Investors are becoming even more nervous about the state of Italian politics, and the government bond yields are rallying, while stocks are under major pressure.

Neil Wilson, chief market analyst at Markets.com was of a broadly similar view, saying: "We've seen a steep selloff in risk assets as the Italian political troubles deepen, with investors seemingly dumping their exposure to Italy. Whilst a lot has already been written on the topic, the moves this morning warrant attention as we are seeing some incredible price action in Italian bonds with the market moving at speeds not seen since the worst of the Eurozone debt crisis."