Italy will remain under the control of the present caretaker government and Paolo Gentiloni, the current Prime Minister, will continue his job. The Italian election results have produced a very predictable outcome- no party has a clear majority. In other words, we have a hung parliament and in Italy, there is no pressure or time limit to form a government. So, basically we have a prolong period of political uncertainty which would weigh on country’s economic condition.
We do know that the negotiations process to form a government would take several rounds of talk and months in terms of time period. However, if the discussions turns really sour and situation starts to look like out of control, there are strong chances that Italians may have to go back to the polling stations to vote again
Nonetheless, for now, the reaction from the markets is more subtle. Initially, the Euro popped to the upside as investors celebrated that the worst outcome didn’t become a reality- the Five Star movement party, coming into the power. But, it is not all glory for the Euro, because in Germany, the leadership of German Chancellor, Angela Merkel, has weakened and she has a lot to deal with. The combination of hung parliament, Angela Merkel losing some control over in Germany and fears of trade war are going to weigh on the euro.
Moving away from this, the trade war is the major focal point for investors. We do see a full scale trade war coming as other countries would not stay reticent and watch the show. The full blown trade war would hurt the global economy and the risk sentiment would only spur further.
