Important economic data will be reported next week. Japan
reports the results of its latest Tankan survey and the household spending
(following today's report of disappointing retail sales). The EMU's March
inflation report and February retail sales are on tap. The US jobs
and auto sales for March will be released.
It is also the start of the next phase in Italian politics, which since
the election in early March has not been much of a market factor.
Indeed, the Italian equity market is the best performing within the G7 this
month, losing a little less than 1%. Italian bank shares have
declined by 3.9% this month. They fell by nearly 1.6% in February.
However, it seems to be simply paring the out-sized 13.3% rise in
January.
The 10-year bond yield has fallen 15 bp this month, matching the decline
in German bunds, though trailing behind the 35 bp decline in Spain.
At the two-year tenor, the Italian yield has fallen 12 bp, edging out Spain and
twice the decline that Germany experienced.
In the middle of next week, Italy's President Mattarella will begin
consulting with party leaders to see if a majority government can be formed.
There are four key players here. The center-left PD, who's leader, Renzi,
insisted that it goes into opposition have a horrific showing in the polls
before resigning. The center-right accounts for two of the players
Berlusconi's Forza Italia and the Northern League (Salvini). The Northern
League edged out Forza Italia by four percentage points and so its ostensibly
the senior party in the coalition. The Five Star Movement (M5S) won a
plurality of votes, but not a majority.
There are a few more wrinkles in the plot. First, due to a tax
fraud conviction, Berlusconi cannot serve hold office until 2019. Second,
Berlusconi had campaigned only force that could stop the populist M5S.
This further strains ties between the two camps. Third, Salvini of the
Northern League has stuck with Berlusconi and is resisting M5S from pulling
them apart. Fourth, Berlusconi and Salvini are opposed to the head of the
M5S, Di Maio, from becoming the next premier, which he seems to believe he is
entitled to as the head of the party with the most votes.
It took Belgium over a year to cobble together a government after a
recent election. It took Germany the better part of six months to
form a government of the same parties that were in the outgoing
government. Nest week will be a month since the Italian election.
While the situation seems fluid and it may be premature to reach any strong
conclusions, the outlook is not particularly encouraging.
Recall that during the campaign, the M5S ruled out forming a coalition
and the other parties wanted little to do with it. Many, like
ourselves, thought the most likely outcome was going to be a government like
the present one, with center-right and center-left represented. However,
like in a few other European countries, including Germany, the centrist parties
did miserably.
During the campaign, the M5S had modified its rhetoric. It was
no longer vocally hostile to the euro or the EU. It seemed to be remaking
itself into a social democratic, green political party. From an outsider’s
vantage point, it seemed like the PD was a better ally. However, the PD
seems missing in action, allowing the center-right to eclipse it.
Although there was a working agreement between the M5S and center-right to
elect the speakers of both chambers of parliament, the relationship seems
exceptionally prickly.
The election was held under new rules that had ostensibly been designed
to facilitate more sturdy governments. If Mattarella finds that after
several weeks, a stable coalition remains elusive, a technocrat government
could be put into place that would seek to modify the election rules again and
go back to the polls. This might ultimately be in the PD and Berlusconi's
interest. It might allow the PD to regroup and maybe even recover the
left flank that split from it last year. If the next election is deferred
sufficiently, Berlusconi's ambition can be exercised again. The M5S
thinks that it has the momentum. Northern League's Salvini was quoted in
the press as saying it there was a 50/50 chance of a new election.
Disclaimer
Next Phase for Italian Politics
Reviewed by Marc Chandler
on
March 29, 2018
Rating: