Where Is The Anxiety Ahead European Political Risk On March 4?

Among the biggest political risk of the year is at hand. The results of the SPD vote on whether to join another grand coalition and the national election of Italy are due Sunday. The market is unusually calm about it.

The euro is trading sideways, a couple cents below the multi-year high set two weeks ago near $1.2550. Speculators in the futures have hardly pared back a record net long position (263k contracts in late January vs. 239k as of February 20).

Italian bonds and stocks have generally done well. Its shares have outperformed both Germany and Spain in the run-up to this weekend as well as year-to-date. Italy’s bank share index has risen 11.4% year-to-date.

Since the start of the year, the 10-year Italian yield has risen 1.4 bp. The yield on a similar obligation from Spain is flat and the German yield is up more than 24 bp.  Italy’s 5-year credit default swap finished last year near 118 bp. It was at 105 yesterday and was down to near 96 bp a few days ago.

Surely someone is concerned the SPD could reject the grand coalition, which would leave Germany with either a minority government or new elections. Recent polls warn that the SPD’s support has continued to wane since last September’s election and that is slipping behind the AfD. The SPD can not choose to be in a grand coalition, but if a new election is required, it may not have enough votes, which would likely require the participation of the FDP or Greens.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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