Focus on the Italian Political Risk

The news of the day, Monti's cabinet looses Berlusconi's PDL party support.

Berlusconi PDL party dropped at 15% of consensus, therefore he is starting to  implement its strategy:

1. to say to voters that the poor economic situation is due to Monti's politics that Mr. Berlusconi does not share .
2. to avoid that a double round of elections (Feb 10  local elections in Rome region and March 10 or April 7 national elections) will give a double blow to its consensus.
3. For Berlusconi, at this point, better to keep the old electoral law where the list of candidates is defined by the party head and not left to voters preferences.

The PDL attitude in Parliament seems to grant the necessary quorum but leaves to the center-left PD and centrist UDC the obligation to approve Monti's last measures.
The only necessary law that Italy needs by year end is the Stability Law, but this one has a minor economic impact this year where main budget measures have already been taken. At this point a change of electoral law to dilute the majority premium is less likely.

Bersani PD's party has 31% of consensus together with leftish SEL-Vendola it could get almost 36% and with current electoral law win Low Chamber majority. The Senate situation is less clear, since the majority premium is the sum of regional wins and this leaves room to a Monti 2nd term. Or alternatively we could have an “acceptable” solution: Bersani led cabinet and Monti to become the new Head of State in May.

A last point on the Head of State Napolitano:
He would like to vote as late as possible since his mandate expires on May 8, and he wants his successor to appoint the new prime minister.

During the press release that just ended Mr Monti highlighted to be in constant talks with the Head of State waiting to know his thoughts about the actual political situation, to the question can your government go on without Berlusconi's PDL the answer was… We are waiting for the Head of State's decision.

According to us it looks like we are living the “political risk” that up to now has been postponed to the end of the Monti period.

From the market stand point for sure it's not a good news as showed by today's Ftsemib performance, the Italian equity benchmark traded 0.75% lower to 15,835.22.

The current political imbalance for sure will put pressure on the Euro versus the greenback, it's now trading at 1.2955$ or 0.75% lower, and will support the breakout we highlighted in the bund in our previous post.

Nevertheless, the broader Stoxx50 was able to close 0.44% higher to 2,603.41, therefore a cross asset trade setup is in place where we got two of the tree assets signaling a short in the third one ..but as we said in the past cross assets trades are not cash cow, it all comes down to timing.

Have a great evening

Originally posted at www.77sigmatrading.com