Italy’s Grillo Talks Down The Euro

There was a lot of noise out of Italy this weekend on election developments; however there is no more certainty on the formation of a grand coalition versus the call for another election. Italy’s FTSE MIB equity index is bearish TRADE and TREND and is now down -13.1% since its YTD high on 1/29. Of note is that Beppe Grillo said that he wants an online referendum on Italy’s membership in the EUR.  Make no mistake about the impact of social media and a former comedian (Grillo) can have on the EUR/USD.

 

Election Developments in Italy

 

It’s no clearer today whether there will be a formation of a grand coalition or the need for another round of elections. Here’s the update:

  • Neither Bersani nor Grillo are pushing for a coalition
  • Bersani insists he would form a new government on his own without seeking an alliance with his main rivals, Berlusconi and Grillo
  • Bersani issued an ultimatum to Grillo to support a temporary government
  • Grillo is repeatedly against a coalition but said his party might support a government if it changed the electoral law, cut politicians expenses and set a two-term limit for parliamentarians
  • Italian President Giorgio Napolitano is exploring the possibility of putting together a coalition between the center-left and center-right, but with neither Bersani nor Berlusconi as Prime Minister. Two names are under consideration are former center-left prime minister Giuliano Amato and Matteo Renzi, the reformist Democrat mayor of Florence
  • Berlusconi says he is in favor of going down this route only if the center-left agrees to support his yet to be named candidate to succeed Napolitano as president after his seven-year term ends on May 15th
  • Napolitano has been adamant that he wants to avoid an immediate vote

Our critical level for the FTSE MIB is TREND line resistance of 16,449. The index is broken on both its immediate term TRADE and intermediate term TREND levels.

 

Italy’s Grillo Talks Down The Euro   - y. mib

 

On Grillo’s EUR Talk

  • Grillo said that he wants an online referendum on Italy’s membership in the EUR. While such a vote would not be legally binding in Italy, it could carry a lot of political weight given the power of social media. We think the call should influence the EUR/USD to the downside.

Our critical quantitative lines on the EUR/USD are outline in the chart below:

 

Italy’s Grillo Talks Down The Euro   - Y. eur USD

 

The spread on the Italian 10 year yield and German bunds shows no abatement in the steady rise. Given the runway of political uncertainty we expect this spread to continue its move higher over the coming weeks.

 

Italy’s Grillo Talks Down The Euro   - y. cds spread

 

 

Matthew Hedrick

Senior Analyst