Summary
Italy’s stock and bond rebound stuttered on Tuesday after the first parliamentary speech by new Prime Minister Giuseppe Conte – a clear sign investors continue to perceive the country’s coalition government as a risk.
Approval
The speech did not shy away from a warning over EU fiscal rules. These should be 'aimed at helping citizens', Conte said, noting Italy would negotiate changes to EU governance. Conte did not, however, mention a previous pledge to abolish pension reform and whilst he reiterated plans for flat income tax, no timeline was offered.
All told, it was a measured speech from the new politician. Coalition leaders Luigi Di Maio and Matteo Salvini, less known for restrained rhetoric, nodded their approval throughout. Later, the coalition’s Senate and lower-house majorities should ensure confidence votes go in the government’s favour.
Not so relaxed
Benchmark BTP yields contrasted with smoother politics by closing higher on Tuesday for the first time since last week’s ructions. The spread between Italy’s two-year Italian bonds to their German counterparts was just slightly below 150 basis points compared to less than 50bp on average in the first four months of the year. This shows Italian markets have yet to relax by much. The euro should continue to be capped below $1.175 until they do.
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