As Italian politics seemingly sets the direction for European stocks, analysts say there’s a multiple ways the tenuous political situation can be resolved.
Italy’s FTSE MIB I945, +2.06%, up about 12% for the year, rallied 2.02% to 20902.76 as the nation waits for President Sergio Mattarella to decide whether to hold fresh elections after the resignation of Prime Minister Giuseppe Conte on Tuesday.
The Italian situation was difficult for experts to predict. Possibilities included a snap election, a coalition between the 5 Star Movement and the Democratic Party, or a reconciliation between the 5 Star Movement and the League.
“5S-PD is the only alternative majority in the current parliament able to swear in a new government, whether short or long-lived. Failing that, snap elections become inevitable,” said analysts at Citi in a note to clients.
The possibility of a snap election—and the VAT increase of 3 percentage points it would automatically trigger—is a concern.
UBS cut its GDP forecast for Italy by 0.2 percentage points this year, and another 0.3 percentage points in 2020. “The main drivers of our estimate cuts are the weakness in global trade, which affects Italy’s manufacturing sector, the risks stemming from the introduction of car tariffs and the political uncertainty which is impacting companies’ capex plans,” said Matteo Ramenghi, chief investment officer of UBS Wealth Management Italy, in a note to clients.
Florian Hense, a European economist at Berenberg Bank, assigned 40% odds to Italy avoiding an election for at least nine months, 50% odds of a technocratic government and an election next year and 10% odds to snap elections later this year.
“Italy needs pro-growth reforms and a responsible fiscal policy. The more an Italian government gets real, the more flexibly the EU will interpret its fiscal rules and the less Italy will be a candidate for a debt crisis in the wake of the next serious economic downturn,” Hense added.
After declining on Tuesday amid political upheaval in Italy, the Stoxx Europe 600 SXXP, +1.34% surged 1.26% to 375.98.
The German DAX DAX, +1.46% jumped 1.37% to 11810.94, the French CAC 40 PX1, +1.77% surged 1.65% to 5433.08 and the U.K. FTSE 100 UKX, +1.21% increased leaped 1.21% to 7211.41.
Focus stocks
Renault RNO, +4.76% shares climbed 4.8% and Fiat Chrysler Automobiles FCA, +4.07% rose 4.1% as Il Sole 24 Ore said deal talks between the two auto makers may be back on the table.
Pandora shares PNDORA, +14.53% jumped 14%, extending gains after the jeweler announced a restructuring plan and reported a 10% drop in comparable-store sales in the second quarter. Pandora said it was making progress on a turnaround strategy and being more aggressive in marketing in the U.K. and Italy.
OneSavings OSB, -4.50% shares fell 4.5% after the bank reported a decline in first-half earnings. Its net interest margin fell and it said it won’t be able to produce detailed guidance for the full year as it is merging with Charter Court Financial Services CCFS, -3.77% .
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