Italian markets and country-specific exchange traded funds breathed a sigh of relief after a pro-European Union candidate led the polls, alleviating fears of a breakdown of the euro currency bloc and the benefits that more troubled periphery states enjoy.
The iShares MSCI Italy Capped ETF (NYSEArca: EWI) surged 6.4% Monday, with underlying Italian markets enjoying their best day since December, as Italian equities were caught up in the general market euphoria.
Equities rallied in what appeared to be a relief trade after Emmanuel Macron, an independent centrist and pro-European Union candidate led at the French presidential polls, closely followed by Marine Le Pen, the leader of the far-right National Front and proponent of a “Frexit” or French exit from the E.U.
Early polls also indicated that Macron is likely to defeat far-right rival Le Pen in the runoff on May 7 with a comfortable 60% majority.
Riding on the limelight, Italian stocks rallied as markets bet the fate of the Eurozone’s third largest economy inside the union could be more secure under a strengthened E.U. backed by Macron, reports Mehreen Kahn for the Financial Times.
Analysts at Bank of American Merrill Lynch expect Italian assets to benefit “as Frexit risks diminish and confidence in the economic recovery is bolstered”.
The clear outlook helped assuage troubled Italian markets that has been plagued by a number of political risks. For example, former Prime Minister Matteo Renzi resigned in December following a no-confidence referendum. At the time, some market observers believed Renzi’s resignation could lead to early elections and a rise in support for the populist anti-euro Five Star Movement. The party would seek to carry out a referendum on Italy breaking away from the Euro area.
Italian banking stocks have also been improving since the December 5 low after Renzi announced he would resign following the referendum defeat on December 4, which also fueled heavy short covering and further bolstered prices.
Financials make up the largest portion of the Italian markets, comprising 33.5% of EWI’s underlying holdings.
“France is downgraded in terms of being one of the market’s principal concerns, another source of worry will take its place”, Richard McGuire at Rabobank, who expects Italian debt to underperform its major European peers, told the Financial Times.
Rating agency Fitch also recently cut Italy’s sovereign borrower rating to just two levels above junk last Friday, citing near-constant failure to meet budge targets and debt which is at the second highest in the Eurozone after Greece.
Italy is “more exposed to potential adverse shocks” Fitch said. “This is compounded by an increase in political risk and ongoing weakness in the banking sector which has required planned public intervention in three banks since December.”
For more information on Italy, visit our Italy category.