Market participants should keep an eye on political developments in Italy - Wells Fargo

According to analysts from Wells Fargo, political risks appear to be rising in Italy and could bring tension to financial markets. 

Key Quotes: 

“In our view, market participants should key an eye on political developments in Italy in coming months. If the Italian parliament approves legislation in coming weeks that would usher in a new voting system, then Italians could be heading to the polls this autumn for a general election. Recent opinion polls suggest that the populist M5S would do well in a near-term election, perhaps winning enough seats to form the next government.”

“Electoral success by the M5S could send shock waves through Italian financial markets, and yields on Italian government bonds likely would move higher, perhaps significantly. Volatility likely would spill over to financial markets in other economies if investors started to fret about prospects for long-term debt sustainability in Italy.”

“We are not saying that default and financial crisis in Italy is inevitable. Potential volatility in Italian financial markets, and more broadly in financial markets worldwide, in the weeks and months ahead depend upon a number of political developments in Italy that are difficult to forecast. Even if Eurosceptic parties such as the M5S come to power in Italy, there is no guarantee that Italy will leave the Eurozone in the foreseeable future.”

“The relative calm that has prevailed in financial markets in recent months could potentially be threatened, at least for a period of time, if political risk in Italy were to come to the fore.”