Will Italy re-fuel Euro-area woes? – Nordea Markets

Analysts at Nordea Markets note that the Italian political woes have re-surfaced after Lega Nord and the 5-star movement (M5S) are allegedly on the verge of forming a coalition.

Key Quotes

“While such a coalition outcome is certainly not to the markets’ taste, the spike in Italian bond yields over the past days is still relatively contained in a broader perspective. Italian spreads versus Germany are still substantially below the levels that the Europhile Matteo Renzi (PD) left office with in late 2016.”

“The signals from the new coalition so far are volatile to say the least. Hence, we warn against jumping to conclusions on every headline with “sources” speaking out of Italy, as in particular the M5S has already had to throw out several of its elected members and doesn’t look like a party that is even close to agreeing with itself.”

“While we don’t see good odds for the long-term survival of this new anti-establishment coalition (nor for an Italexit), there are still good reasons to be worried short term. Italian assets and the EUR could have more room to suffer short term. In the FX space EUR/CHF should be the most obviously sensitive pair to further Italian tensions.”