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Italian politics have been one of the biggest drivers of uncertainty within the eurozone in 2018, with fears associated with the new coalition government raising risk aversion throughout the region.
That coalition is formed of two populist parties, with a general anti-establishment and Eurosceptic theme running through both. With the coalition built on a pledge to end austerity, shifting the emphasis shift away from keeping the European Union (EU) happy and instead focusing on doing right by the everyday person.
However, this fiscal expansion raises fears of a potential ramp up in the debt burden currently seen in Italy, alongside a potential increase in tensions with the EU. The debt issue is one critical concern for the EU given the fact that Italy has the second highest debt-to-gross domestic product (GDP) level (130%) in Europe . With treasury yields rising over growing concerns, we are seeing the price of servicing their ballooning debt rise further.
Yesterday we saw the European Commission (EC) reject the latest Italian budget, raising the possibility of sanctions being placed on the Italians. That 130% debt-to-GDP level is more than twice the limit set by the EU, thus reducing the likelihood that any budget which raises the deficit would be passed.
The Italian coalition is standing by their plans and refuses to reduce spending, yet with the EU unlikely to budge, we are set for an impasse which will dent confidence for some time yet. With Five Star Movement leader, Luigi Di Maio, having previously declared that Italy would 'no longer satisfy rating agencies and financial markets while stabbing Italians in the back', there is plenty of reason to believe European and, in particular, Italian markets could suffer for some time yet.
Looking at the Italian FTSE MIB 40 index, we can see another month of losses look almost certain, building on the downturn seen since topping off at the historical resistance level of 24,568. Things look highly likely to persist over the coming months, with a move into the potential trendline or a drop into the range bottom of 12,338 coming into play.
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