Investors do not seem to care much about political developments - BBH
"Investors do not seem to care much about political developments provided they are local and do not pose systemic risk," BBH analysts argue.
Key quotes
Italy may pose such risk, the argument goes, because the largest parties want to ditch the euro. Perhaps learning a lesson from Greece's experience, the Italian politicians are more circumspect.
Germany does not have a government, though the election was more than three months ago. Spain, Portugal, and Ireland have minority government. Austria is the first government since the financial crisis to include the populist right. The EU is trying to press Visegrad group of central European countries to conform to the values of Western European members. And yet it is Italian politics and the election on March 4 that is drawing attention.
Moody's has a negative outlook for Italy's (Ba2) rating, and a positive outlook for Portugal (it did not upgrade the rating in 2017 when S&P and Moody's did). S&P is to review Portugal again just after the Italian election. Fitch reviews Italy' (BBB) rating in the middle of March and S&P will announce the results of its review (BBB) in April. Both S&P and Fitch have positive outlooks for Spain (BBB+) but update their reviews in late March and July respectively.
Italian stock market has risen a little less than 1% of the past month. Europe's Dow Jones Stoxx 600 has risen 1.75% at the same time. That include Italy' outperformance this week. In the first three sessions, the FTSE Milan Index has risen 3.25%, easily the best performer of the major European bourses.
If an increase in the risk premium for Italian bonds is among the clearest implications in the run-up to the Italian election, then what are the implications for Italian equities. Conducting the correlation on the level of the Italian equity market and 10-year yield, over the past 100 days the correlation is -0.30. The correlation on the basis of change or percentage change, the correlation is about -0.15.