Markets’ reaction to Italian elections

Whether you think that Italians voted for clowns or not, the election outcome was probably near the worst case scenario for markets. The only worse outcome would have been an outright Berlusconi majority in both houses of parliament. As it happens, after an initial strong drop, markets have taken the election results in stride. This may sound strange, if you consider that one Italian out of four voted for Grillo, ¼ for Berlusconi, ¼ for Bersani, and the balance voted Monti or didn’t vote.

One way to explain this mute reaction is that the situation now is very different than the situation in November 2011. At that time, Italy needed to put in place measure to steer the ship, say at least 90 degrees away from the Berlusconi’s route, and that required action. In early 2013, the situation is very different. Monti’s government steered the ship due north towards quiet waters, and until a new captain changes course, Italy is in a sound route. Given that no government from one party will be able to rule, it is likely that it will take some time for a new government to take office and in any case it will be a coalition that will either include Monti or that will be led by a Monti like technocrat. The markets don’t mind such a solution at all, as in 2013, no news is good news!