- Italian elections on Sunday have returned a hung parliament.
- UBS says “lengthy negotiations” over the formation of the next government now likely.
- This could lead to “increased volatility” of Italian assets.
LONDON – UBS expects “lengthy negotiations” over the formation of Italy’s next government after inconclusive elections on Sunday.
Early indications suggest Sunday’s vote will return a hung parliament, with the anti-establishment party the 5-Star Movement the biggest single party with around a third of the vote.
Matteo Ramenghi, chief investment officer of UBS Wealth Management Italy, said in an early morning note to clients on Monday: “We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets.”
Ramenghi said there are three main options now: “a broad grand coalition, repeat vote or, perhaps, an anti-establishment alliance.”
“We think a broad grand coalition would likely be well received by financial markets as it could lead to political stability and a continuation of current economic policies whilst its lifespan would be in question,” he wrote.
“Repeat elections could prolong uncertainty and weigh on financial markets’ perception of Italy’s risk. An anti-establishment alliance of M5S and Lega, the worst case scenario for markets, looks unlikely due to different programs.”
The euro dipped against the dollar and pound as the election results filtered through. The euro is down 0.10% against the dollar to $US1.2304 at 8.45 a.m. GMT (3.45 a.m. ET) and down 0.06% against the pound to £0.8922 at the same time.
The FTSE MIB index in Milan is down 0.71% at the same time. Indexes across the rest of Europe have mostly opened slightly positive.
Ramenghi said: “The Italian equity market has not priced in electoral uncertainty, but current yields on government bonds suggest they have incorporate some political risk.”
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