Political risk is back to haunt European stock markets

by Dramelin 7:30 AM 0 comments

His note traced how Italy became the most Euroskeptic of all the euro zone nations and highlighted that immigration had become the main topic of this current political campaign.
He also stated plainly that budgetary issues would be at the forefront of any winning party`s plans, and reminded readers that Italy still needed to find a solution to an "undercapitalized banking system burdened by a mountain of non-performing loans.
" Italy`s fragile economy is why this election is so very different to Germany`s and why many analysts singled out this vote at the start of the year as being a major a risk factor for 2018.
Germany`s political mess caused little distress in European stock markets in 2017, but Italy is a different prospect.
UBS, which as a bank is quite bullish on these elections, offered a warning for equity investors.
A global research team at the Swiss bank has a central scenario that does not factor in any macro or political shock, but in a note Friday it said it "cannot fully rule out tail risk," which could trigger a 10 to 15 percent downside for Italian equities relative to other benchmarks in Europe.
The bank suggested that Italian sovereign bonds should be carefully watched and any sharp rise, when compared to Germany`s yields, is traditionally bad for the country`s equity markets.