The government crisis worries financial investors. All eyes are on Wednesday 20 July when Mario Draghi will go to Parliament and despite the push to stay coming from the Democratic Party and Matteo Renzi and more timidly from Forza Italia and Lega, the situation becomes more complicated as the hours go by instead of improving . Berlusconi and Salvini they have clearly stated that they are only ready to support a Draghi Bis if the M5S remain outside the majority. The Democratic Party claims exactly the opposite and tries to mend. The M5S are increasingly divided.
What about finance? The markets, on Friday, made it clear that they are advocating a rethinking of Draghi and in any case they hope for it. The stock exchanges all closed positive and the signal was clear. The week therefore opens with a look at Wednesday's appointment and, immediately afterwards, at the meeting of the ECB which must decide on rates and the anti-spread shield. Here is the point of view of three strategists which gives an idea of the concerns of the managers and how the European markets could move in the coming days.
Draghi's resignation: the vision of Matteo Ramenghi, Chief Investment Officer of UBS WM in Italy
“Although Italy is no stranger to the political theater, the uncertainty caused by the government crisis could have an impact on the markets more than usual, as it precedes an important ECB decision on intervention plans in the bond markets. Also, the markets are worry about the Recovery Fund, which will be a determining factor for the economy in the coming years, especially in the wake of the increase in the prices of raw materials”.
Draghi resigns: the opinion of Peter Goves, European Interest Rate Strategist of MFS Investment Management
“Draghi's resignation came as a surprise for the market and led to new ones political uncertainties for BTP spreads. The next appointment for the markets will be on July 20, when Draghi will address Parliament and could be the key to the future of any government. It is plausible that Draghi can remain prime minister or that a new caretaker government takes office. In any case, this situation complicates things for the ECB. Overall, therefore, we remain vigilant on such spreads in the short term".
Draghi's resignation: the scenarios according to Filippo Diodovich, Senior Market Strategist of IG Italia
“Italian political uncertainty has led to strong tensions especially on Thursday on both the stock and bond markets with the spread rising to a maximum of 228 basis points in the last four weeks. Prime Minister Draghi's resignation had in fact scared investors on a la long period of political instability in a particularly delicate moment for the economies of the Old Continent. The freezing of the resignation by the President of the Republic Sergio Mattarella and the postponement to Wednesday in Parliament to try to find a solution in extremis to keep the former governor of the ECB at the helm of the Palazzo Chigi executive have defused the sales on the financial markets .
We believe the markets are discounting a new government solution always headed by Draghi, given that the alternatives (ferryman government and new elections) seem to be too punitive for the Italian economy in such a delicate moment both from a geopolitical point of view (war in Ukraine) and from an economic point of view (energy crisis, requirements for PNRR funds, budget law, anti-spread shield and risks of recession) and from the health sector (new vaccination campaign for the fourth dose).
We believe that a solution with Draghi at the head of the executive can reduce financial tensions and bring the spread back to 200 bps. Draghi at Palazzo Chigi would be a solution much favored by the European institutions and would guarantee a more accelerated process for the ECB's program to avoid financial fragmentation within the eurozone (the so-called anti-spread shield). Other solutions may lead strong tensions in the short term with a btp-bund spread well above 250 basis points which could even go further towards 300 bps in the event of early elections (which would probably be held in October)”.
