William Sobczak
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Updated 30 May 2018
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Disclosure – Non-substantive Research

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. With this commentary, Kepler Partners LLP does not intend to influence your investment firm's behaviour. 

Fresh news from the Quirinal Palace on Saturday – with the Italian president effectively vetoing the government put forward by the anti-establishment Five Star Movement and the far-right League – has put Italy, and the future cohesion of the Eurozone, in the spotlight once again.

Stocks and bonds were already under pressure before the announcement that the coalition’s preferred candidate for finance minister – Paulo Savona – had been rejected by the president, who put forward instead Carlo Cottarelli, a former IMF official, who some argue plays into populists’ hands as another example of the Italian establishment’s thrall to Brussels.

The League and the Five Star Movement have previously called for Italy’s withdrawal from the Euro and both support policies which would ride roughshod over eurozone rules on budget deficits. The danger is that, by appearing to pander to Brussels, the president’s action on Saturday may backfire – fomenting even greater populist feeling among a population already deeply resentful of EU ‘meddling’.

While this may seem like a return to form for the troubled Union after an uncharacteristically smooth patch, we think a sanguine approach makes sense. Italian politics works on compromise and backtracking, and the coalition documents suggest an exit from the euro is not on the cards. In fact, with the economic environment in Europe generally positive, any volatility in Europe generated by the headlines surrounding Italy could throw up some interesting opportunities.

Viewed with a cooler head, little has changed in Europe since the weekend and the environment of low inflation and cheap money looks set to remain dominant. Unprecedentedly loose monetary policy from the ECB remains firmly in place, and the debate continues over whether the eurozone economy will be strong enough to allow policymakers to end the QE programme in September. President of the ECB, Mario Draghi, has recently announced that the interest rates on refinancing and on lending would remain unchanged at 0 per cent and 0.25 per cent respectively for the foreseeable future, providing technical support for European stock markets.

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