Italian Election Weighs on Italian Assets, but Little Systemic Risk Seen

The Italian election results look a bit more euro-skeptic, but the not
far from what the polls showed. 
Coalitions matter under the new
electoral rules, and the center-right coalition appears to have the most votes,
followed by the 5-Star Movement, and then the center-left in third.  
There were two surprises.  First, the center-left did poorer, with the PD
receiving only about half as many votes as they did in the last European
Parliament election.  Second, Berlusconi’s political party also did worse
than expected.  It trailed the Northern League.  

After the final count, the next step is for Italy’s President Mattarella
to let one group try to put together a government. 
The issue here
appears to be whether it should go to the party with the most votes, or the
coalition with the most votes.  The former would imply the 5-Star
Movement, though it has eschewed coalitions and other party leaders has
indicated the sentiment was reciprocal.  The latter would imply the
center-right.  

It is not clear the strength of the center-right coalition. 
Operas often have double-dealing and back-stabbing (defections in game theory),
and the drama of Italian politics often seem have an operatic
quality.   It will take some time to sort this out, but Italy is in
fine company.  It took Belgium over a year to get a government after the
last election.  It took Germany four-months.   Is it unreasonable to
suspect that Italy will come in between those two markers?

Separately, and only underscoring the challenges that lie ahead, Italy’s
economy did not seem to have the same momentum as other large economies in the
euro area, but its loss is even greater. 
The February service PMI
fell to 55.0 from 57.7, and coupled with the disappointing manufacturing
survey, the composite fell to 56.0 from 59.0.  The pullback brings the
composite back to levels seen in November, and it is still above last year’s
average.  

Italian assets have been sold, after holding their own or outperforming
in the run-up. 
The stock market is off 1.1%.   Today’s loss
puts the FTSE Milan Index lower on the year (-0.8%), but it is the best
performing of the major European markets this year.  Within the G7, only
the S&P 500 is up on the year (~0.65%).   Italy’s benchmark
10-year yield is up four basis points to 2.0%.  It is virtually flat on
the year.  The two-year yield is up two basis point to minus 19,
which is an increase of about nine basis points this year.  It compares to
the eight basis point increase in Germany and 19 in Spain for a comparable
tenor.   The 10-year Gilt and 10-year Bund yield are near five-week
lows of 1.45% and 62 bp respectively. 

Other European equities are higher today, with the Dow Jones Stoxx 600 up
0.6%, snapping the four-day decline. 
All the major sectors are higher
except financials with are slipping into negative territory in late European
morning turnover.  European 10-year yields are mostly lower.  The
euro has been in a cent range between $1.2270 and $1.2370.   In European
activity, the single currency has enjoyed straddled the pre-weekend close that
was a little below $1.2320.  There is a 519 mln euro option struck at
$1.23 that expire today.  

The eurozone service and composite PMI readings were a bit softer than
the flash readings.
  The service survey slipped to 56.2 from a flash
reading of 56.7 and 58 in January.  The composite reading eased to 57.1
from the 57.5 flash.  It stood at 58.8 in January and averaged 57.2 in
Q4.  The revisions seem to reflect the soft Italian reading and
disappointing final readings in France.  The flash readings in France also
told of some loss of momentum and the final report showed even more.  In
contrast, Germany’s services PMI was in line with expectations while the
composite was revised higher (57.6 vs. 57.4 flash).  To round out the
large EMU members, note that Spain bucked the regional loss of momentum and
both the service and composite extended January’s gains.  

Asian shares fell, with the MSCI Asia Pacific Index off 1% for the fifth
consecutive loss. 
China’s markets resisted the regional pull and
managed to eke out minor gains.  The Caixin PMI for services and composite
were softer but difficult to put much stock in given the distortions of the
Lunar New Year.  Separately, the government announced plans to the
National People’s Congress that the growth target this year is around
6.5%.  It also announced cuts in mobile phone service (30%?) and in
many tariff schedules.  

The US dollar is narrowly mixed.  The Japanese yen remains
firm.  The dollar appears stuck in a narrow range.  Near JPY105.20
the seems to be some short-covering pressure in front of JPY105.  On the
top side, the greenback is encountering offers in front of JPY105.80. 
Sterling is firm against the dollar as it recovers against the euro. 
Before the weekend, the euro reached GBP0.8950, its best levels since last
November.  The euro is testing GBP0.8900 that was previously
resistance.    The dollar-bloc currencies continue to trade
heavily.  Australia reported a dramatic jump in apartment building
approvals (42%+) that sparked a 17.1% jump in overall approvals.  While
the Canadian dollar is inside last Friday’s range, the Aussie has traded on
both sides of its pre-weekend range.  A close above $0.7775 or below $0.7740
could potentially be important.  

In the US session features the Markit services and composite PMI, while
the ISM reports the results of its non-manufacturing survey.
  
The main report of the week is the jobs data at the end of the week and another
robust report is expected.  We note that the weekly initial jobless
claims, and its four-week moving average are at new cyclical lows. 
Several Fed officials speak this week ahead of the quiet period ahead of the
March 21 FOMC meeting.  Quarles speaks today, but Dudley and Brainard
speeches tomorrow may be the most important. 

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