Stock Market Drop Is Greatest Threat To Global Stability, According To The Economist

Forget war with Russia, China, or nuclear threats from North Korea; ignore Middle East chaos; and don't worry about global cyber-attacks on critical infrastructure. The Economist Intelligence Unit 'scores' the greatest global risk right now is a "prolonged fall in major stock markets."

EIU begins by pointing out that, there has arguably never been a greater disconnect between the apparent strength of the global

economy and the magnitude of geopolitical, financial and operational risks that organisations are facing.

Despite the encouraging headline growth figures, the global economy is facing the highest level of risk in years. Indeed, this favourable economic picture appears to come from a completely different world to the one where headlines are dominated by protectionist rhetoric, major territorial disputes, terrorism, surging cyber-crime and even the threat of nuclear war. The global economy has seen periods of high risk before, with threats emanating from the regional and the national level, as well as from state and non-state actors.

What is unique about this period of heightened risk, however, is that unlike other periods in recent decades, risks are also originating from the global level, as the US questions its role in the world and partially abdicates from its responsibilities. These moves have signalled the end of the US-led global order and the beginning of a new order. Although the new order will emerge over the next decade, there will be a period of uncertainty as multiple global and regional powers vie for power and influence. For organisations attempting to negotiate these concerns in order to take advantage of the numerous and growing economic opportunities, the stakes are obviously high.

In this report EIU identifies the top ten risks to the global political and economic order...

The Economist Intelligence Unit sees a number of risks, with their roots in the US, China and the EU. However, these risks are not limited to those geographies alone, and they could morph into threats that destabilise large parts of the world. In addition, there are risks that either come from smaller regional hotspots, or are global in nature.

This table highlights The Economist Intelligence Unit's top 10 global risks, ranked in order of intensity. Risk intensity here is measured on a 25-point scale, and is a product of the probability of that risk taking place and the potential impact it would have on the global economy.

Ironic that a US-led global trade war is ranked #1 along with a sustained stock market slump as the greatest risks facing the world right now.

The global economy is moving into a new phase, where more and more central banks will begin to wind down or reverse their loose monetary policy positions in response to vigorous growth rates, giving rise to significant uncertainty.

Any ramp-up in protectionism would certainly have repercussions beyond North America and China. Prices and availability for US and Chinese products in the supply chains of companies from other nations would be badly affected. Consequently, global growth would be notably curtailed as investment and consumer spending fall back.

China Confirms Further Economic Slowdown: Highlights From 2018 Government Work Report

In the latest confirmation that as part of its grand deleveraging campaign, China's economy is set to slow further in the current year, Beijing has set a 2018 growth target of around 6.5%, omitting an intention to hit "a faster pace if possible", as the world's largest nation continues its push to ensure financial stability. While the target of 6.5% is the same as last year, Bloomberg notes that the statement excludes an objective for output growth to be "higher if possible in practice" as it did in 2017.

"The omission from the GDP growth target of 'higher if possible' and the new lower budget deficit target suggest slower growth and a fiscal drag," said Eurasia's Callum Henderson. "This makes sense for China in the context of the new focus on financial de-risking, poverty alleviation and environment clean-up, but is less good news at the margin for those economies that have high export exposure to China."

China's newly downgraded growth target was released Monday ahead of Premier Li Keqiang's report to the National People's Congress gathering in Beijing.

While China's GDP surpassed 2017's target with 6.9% growth, the first acceleration since 2010, economists forecast a moderation to 6.5% this year amid the ongoing deleveraging drive and trade tensions with the Trump administration. To be sure President - or rather Emperor - Xi Jinping has made it clear he will accept slower growth in his push to curb pollution, poverty and debt risk at a time when the world's second-largest economy is on a long-term growth slowdown. As a result, numerical GDP targets have been de-emphasized in favor of higher-quality expansion since last year, according to Bloomberg.

The government also signaled its intent to continue efforts to slow debt growth, and set the budget deficit target markedly lower, at 2.6% of GDP, down from 3% in the past two years; news of the proposed reduction in borrowing sent 10-year sovereign bonds futures higher last week after Bloomberg reported the plan to reduce the budget deficit target.

Commenting on the proposal, Bloomberg's Asia economist Tom Orlik said that "Li's plan for the year is consistent with a moderate slowdown in real growth," noting that "there were signals of significantly reduced fiscal support for growth, and lower ambitions on capacity closures in the industrial sector."

Furthermore, authorities reiterated their prior language saying prudent monetary policy will remain neutral this year and that they'll ensure liquidity at a reasonable and stable level. The report said broad M2 money-supply growth would remain moderate, without including a numerical target as had been previously the case. M2 growth slowed to a record low 8.2 percent in December, down from more than 11 percent a year earlier. A separate report from the National Development and Reform Commission said M2 growth would remain roughly in line with last year's real growth rates.

"We will improve the transmission mechanism of monetary policy, make better use of differentiated reserve ratio and credit policies, and encourage more funds to flow toward small and micro businesses, agriculture, rural areas, and rural residents, and poor areas, and to better serve the real economy," state media reported, citing the work report. The report also said that an increase in the  thresholds for personal income taxes was planned.

Below courtesy of Bloomberg are the other key highlights from China's government work report released today in Beijing.

Import tariff cut (or did Trump win the trade war already?):

• China to lower import tariffs for vehicles and some consumer goods

Internet/Telecom:

• China to cancel domestic Internet data roaming fees in 2018
• China to cut rates for mobile Internet services by at least 30% this year
• China to expand free wifi spots in public areas
• China to lower broadband charges for families and enterprises

Opening up:

• China to expand opening to foreign investment in telecom, new energy vehicle, healthcare and education

Tax and wages:

• China to cut taxes for enterprises, individuals by 800b yuan this year
• China to lift thresholds for for levying personal income taxes, without elaborating
• China to adjust level of minimum wages reasonably this year

Property:

• Govt reiterates that housing is not for speculation and aims to develop housing rental market
• China to steadily push forward legislation of property tax, without elaborating

Capacity Cut:

• China to cut steel capacity by 30m tons this year; to remove 150m coal capacity

Financial regulations:

• China's overall economic, financial risks controllable
• China to boost coordination among financial regulators
• China totally able to prevent systemic risks
• China to improve regulation for shadow banking, Internet financing

Source: Bloomberg

Ray Dalio: "A US-China Trade War Would Be A Tragedy"

With fears that the surge in anti-establishment parties in Italy could result in another Euroskeptic government, this time affecting Europe's 4th largest economy and reincarnating the specter of "Italeave", suddenly Ray Dalio's bearish bet on Europe, which as of a month agoamounted to $22 billion...

... makes much more sense.

In which case one wonders if the manager of the world's largest hedge fund is also starting to aggressively short the US, following his publication moments ago of a LinkedIn blog post in which he warns that a "US-China trade war would be a tragedy" noting that while good deals are to be had for both countries, "a trade war has the risk of tit-for-tat escalations that could have very harmful trade and capital flow implications for both countries and for the world."

Needless to say, Dalio is clearly conflicted, and is motivated in preserving the status quo with Beijing due to his extensive cross-holdings in China. Overnight the SCMP published "The US billionaire investor treated like a rock star in China …" in which it wrote the following:

US billionaire investor Ray Dalio has attracted massive publicity over the past week in China with a gala event in his name in Beijing, an interview with state television and lines from his latest book widely shared on social media. The popularity of Dalio comes after four decades of links to China's economy.

He first set foot on Chinese soil in 1984 when he was invited by the Chinese state conglomerate Citic, to teach China – then a relative economic Communist backwater eager to learn from market economies – how financial markets work.

The 68-year-old American billionaire, whose fund now manages about US$160 billion in assets, took to the stage like a rock star on Tuesday, addressing hundreds of Chinese financial professionals and researchers in a packed room at the Grand Hyatt Beijing. His speech was live-streamed on a number of Chinese media platforms.

A group of China's most renowned economists – including Zhu Min, a former deputy central bank governor, and Qian Yingyi, dean of the school of economics and management at Tsinghua University – showered praise on Dalio and his ideas.

Which is why his main hope is that Trump is, in typical style, exaggerating: "I think and hope that both sides know this, and I believe that what is happening now is more for political show than for real threatening." The reason for this is that "the actual impacts of the tariffs that have been announced on the US-China trade balance will be very small."

Still, "if tariffs are imposed as indicated, I would hope and expect the Chinese response to be small and symbolic so that both sides will have rattled their sabers without actually inflicting much harm."

However, Dalio concludes that "what will come after that will be more important. I wouldn't expect it to amount to much anytime soon. If on the other hand we see an escalating series of tit for tats, then we should worry."

"We"... maybe. Bridgewater, on the other hand, certainly as a result of the hedge fund's prevailing bullish bet on the global economic recovery. Unless, just like in the case of Europe, Dalio has been quietly building up a substantial short bet in preparation for just this contingency.

* * *

Dalio's full note below (source link):

A US-China Trade War Would Be a Tragedy

The markets' reactions to newly imposed tariffs and, more importantly, the possibility of a US-China trade war convey appropriate tip-of-the-iceberg concerns of what a trade war would mean for the US, China, and world economies and markets. To me, these concerns are reminiscent of the markets' first reactions to the possibility of a military war with North Korea—i.e., the seemingly aggressive posture of Donald Trump conjures up pictures of war that are very scary, so the markets react, but that doesn't mean that such a war is likely (at least in the near term).

While I'm not a geopolitical analyst, here's my thinking based on the time I've spent in both the US and China. Take it with a grain of salt.

The Chinese way of negotiating is more through harmony than through confrontation, until they are pushed to have a confrontation, at which time they become fierce enemies. They are more long-term and strategic than Americans, who are more short-term and confrontational, so how they approach their conflicts is different. The Chinese approach to conflict is more like playing Go without direct attack and the American approach is more like playing chess with direct attack. The Chinese prefer to negotiate by finding those things that the people they are negotiating with really want and that the Chinese are comfortable giving up, in exchange for those people they are negotiating with doing the same. Because there are now many such things that can be exchanged to help both parties (e.g., opening the financial sector in China, Chinese investment in the US, agricultural product imports to China, etc.), there is plenty of room for there to be big win-wins.

For these reasons, it's in the Trump administration's interests to make clear what it wants most and, if they can't do that, to not be aggressive until they figure out what beneficial exchanges are. Of course, trade is extremely complex because there are all sorts of interconnections globally, so being clear without adequate time and exchanges of thinking isn't easy.

However, as important as the real trade issues is politics, which is especially important at this very political moment in both countries (i.e., ahead of "elections"). Politics can make politicians act tougher than they should be if they were operating solely in their country's best interests because looking tough with a foreign enemy builds domestic support. Politically for Donald Trump, two of his three biggest strongman promises were 1) to build the wall with Mexico and 2) to reduce the trade deficit with China, by getting tough with them both. Xi Jinping has similarly made commitments to be strong in dealing with adversaries, including the US.

For these reasons, it seems to me that good deals are to be had for both countries, while a trade war has the risk of tit-for-tat escalations that could have very harmful trade and capital flow implications for both countries and for the world. At the same time, I think and hope that both sides know this, and I believe that what is happening now is more for political show than for real threatening. The actual impacts of the tariffs that have been announced on the US-China trade balance will be very small. If tariffs are imposed as indicated, I would hope and expect the Chinese response to be small and symbolic so that both sides will have rattled their sabers without actually inflicting much harm. What will come after that will be more important. I wouldn't expect it to amount to much anytime soon. If on the other hand we see an escalating series of tit for tats, then we should worry.

Italy: What Happens Next, And Why Goldman Just Soured On "European And Market Stability"

Curious "What Happens Next in Italy" after this weekend's elections which resulted in a surge for anti-establishment parties, doomed Matteo Renzi after a disastrous showing by the PD, and resulted in a hung parliament, or perhaps even a goverment of Euroskeptic parties (Five-Star and Northern League)? 

5-Star founder Beppe Grillo with current leader Luigi Di Maio

Italy exit polls pointed to a hung parliament with anti-establishment 5-Star Movement as the largest single party and the Centre-Right seen as the leading coalition, with far-right junior coalition partner Northern League having possibly outperformed Berlusconi's Forza Italia.

Timeline

23rd March: Parliament will gather for the first time

23rd – 30th March: Both the upper and lower houses will elect their respective Presidents and then begin consultations with President Mattarella

30th March – 6th April: President Mattarella will name his chosen candidate to form a government. Note, Mattarella will choose the candidate which he deems to have the best chance of forming a government, not necessarily the candidate whose party gained the largest share of the vote.

**In the week that follows this, the candidate will either accept the mandate and both houses will hold a vote on the appointment. Alternatively, if no deal can be agreed, Italy will then move on to a fresh round of consultations.**

Potential outcomes

Centre-right coalition (Forza Italia/Northern League): This had been touted as a likely option heading into the election. However, that'd been under the assumption that Forza Italia would outperform the Northern League. Since this has not been the case, serious questions have been raised over the possibility of this partnership being formed as Berlusconi (Forza Italia) is unlikely to want to play junior to the Northern League or back its leader Matteo Salvini as a candidate for PM. Therefore, some serious compromises would need to be made in order for this option to go-ahead.

Grand coalition (Forza Italia/Democratic Party): Heading into the election, this had been touted as the most likely outcome. However, the below-par performance by the Democratic Party makes this option mathematically difficult without involving the support of one of the more radical parties; an unlikely outcome. Furthermore, the poor performance of the Democratic Party makes the prospect of a centre-left coalition unviable.

Populist Government (Five Star/Northern League/Brothers of Italy): Such a coalition would depend on the willingness of the Five Star Movement which at this stage appears to be unlikely (despite a recent softening of their opposition to coalitions) given their anti-establishment views. Furthermore, despite being of the populist mould, the coalition would hold fairly wide-ranging views.

Repeat elections: Should all of the above options fail, Italian voters would be sent back to the voting booths in an attempt to break the deadlock. During this period, the current Gentiloni government would operate on a caretaker basis but the ongoing political uncertainty would likely act as a negative to Italian assets.

* * *

Finally, here is Goldman explaining why Italy is now "more vulnerable than before the general election", and why the vote has "negative medium-term implications for stability in the Euro Area and markets."

Italy more vulnerable than before the general election

The official result of the Italian general election is yet to be announced. Electoral projections based on the votes counted so far (from roughly two thirds of the polling stations) suggest that no major party or electoral coalition will win an absolute majority of seats in the Lower House and Senate. These projections indicate that the centre-right coalition will win most seats in both the Lower House and Senate (about 37.1% and 37.5% of seats respectively, according to the latest numbers), with Lega (the anti-immigration, anti-European party led by Mr. Salvini) the leading party of the centre-right, ahead of Mr. Berlusconi's Forza Italia. The Five Star Movement (the anti-establishment party led by Mr. De Maio) is projected to win the highest share of seats for an individual party in Parliament (about 32.1% and 31.9% of Lower House and Senate seats respectively).

If these projections are confirmed, the Italian elections will result in a hung parliament. We expect a bumpy and potentially long period before a new government is in place. In the meantime, the current government will remain as a caretaker. The formation of a new government will come only after a period of negotiations all among political forces.

Centre-left and centre-right parties are unlikely to have enough seats between them in the Parliament to create the weak centrist coalition government that we were expecting. Both the Partito Democratico (centre-left party led by Mr. Renzi) and Forza Italia are projected to win fewer seats than opinion polls suggested.

Given the strong showing of the Five Star Movement, the President of the Republic could grant them first the exploratory mandate to form a government. Based on current projections, an absolute majority of seats could be held, for example, by (i) the Five Star Movement in coalition with the Partito Democratico and its spin-off Free and Equal; (ii) the right-wing coalition with the support of PD; or (iii) by an anti-establishment coalition of Five Star Movement, Lega, and the right-wing party Brothers of Italy. These post-electoral alliances will not be easy to pursue and none of them would be a "friendly" outcome for markets.

A failure for any of these alliances to materialize will likely lead to a technocratic/caretaker government operating under a narrow mandate, most likely limited to a revision of the (recently approved) electoral law. It is conceivable that the Five Star Movement and the centre-right coalition parties will support an electoral law that will include a majority premium to increase their chances of winning an absolute majority in Parliament at the next election. Hence, new elections could occur quite soon, perhaps in a year's time.

Even if a technocratic/caretaker government takes office and pursues continuity in economic policy over the near term, the Italian economy – with its longstanding weaknesses on the growth, fiscal, structural and institutional fronts – remains vulnerable, probably more so than before the election. As we discussed in a recent note (A tale of three macro fundamentals and three catalysts), the outcome of the election is unlikely to lead to a government able or willing to address the fundamental economic frailties in Italy, but rather – were some electoral promises implemented – to exacerbate them.

In our view, the inconclusive Italian vote has negative "medium-term" implications for stability in the Euro area and thus for markets. Even though the prospect of a caretaker government could diffuse tensions for now, the Italian vote suggests little appetite for economic policies that would keep Italian fiscal deficit under the 3 percent Maastricht limit, for example. This will create tension between Italy and its European partners. More generally, the composition of the new Parliament will not be seen as favourable by those partners, especially in northern Europe. We expect the northern Europeans to demand more risk reduction at the national level before further steps towards integration and risk sharing can be made across the EU. The Italian Parliament will likely oppose the former.

US Stock Market: Conspicuous Similarities With 1929, 1987, And Japan In 1990

Stretched to the Limit

There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. "CAPE"/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.

The end of an era – a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in light of the important caesura it represented. In many ways the roaring 20s were the last hurrah of a world in its death throes, a world that never managed to make a comeback. The massive expansion of the State that had begun in the years just before WW1 resumed in full force as soon as the post-war party on Wall Street ended. The worried crowd that formed in the streets around the NYSE in the week of the crash may well have suspected that the starting gun to profound change had just been fired. [PT]

Near the end of a bull market cycle there is always the question of when a decline will begin, and above all, how large will it be. I believe it possible that the retreat in prices will begin soon and that it could possibly even start out with a crash. I will explain in the following what led me to draw this conclusion.

2015 – 2018: the S&P 500 Index Moves Up Along a Well-Defined Trend Line

Let us first look at a chart of the S&P 500 Index over the past three years including the major  trend line formed by its rally. Prices moved up steadily along this trend line for a long time, until the advance suddenly began to steepen significantly in January of 2018. Thereafter prices plunged very rapidly in early February, followed by a swift rebound. This rebound appears to have ended earlier last week.

S&P from 2015 to 2018 with trend line providing support: for now the trend line still holds.

 

In 1987 the Market Crashes after Breaking Through a Similar Trend Line

Let us now compare the developments of recent years to a chart showing the move in the DJIA from 1986 to 1987 (focus on the general shape of the move rather than details such as percentage gains and duration). The similarities between the patterns are quite stunning.

DJIA with trend line, 1986 – 1987. After breaking through the trend line, the index quickly plummeted.

 

In 1986/87 prices also moved up along a rising trend line; there was a similar acceleration of the rally into the peak, followed by an initial test of the trend line and a rebound. After a short while the trend line was tested a second time. When it failed to hold, the crash commenced, soon culminating in a loss of almost 23% in a single trading day on October 19 1987.

Whiplash… the bull market mascot one week after the initial trend line test. [PT]

 

DJIA in 1929 – The Market also Crashes Right after Breaking a Major Trend Line

Let us ponder a chart of the DJIA from 1928 to 1929 as our next example, once again with the major trend line that supported the advance. Once again there are strong similarities to both the current situation and the pattern observed in 1987.

DJIA with support trend line, 1928 – 1929; once again the market crashed right after it tested the trend line that defined the uptrend for a second time and broke through it.

Just as happened both in 1987 and very recently, the market rose along the trend line until the rally suddenly accelerated and peaked; this was followed by sharp pullback and a first test of the trend line, a rebound, and eventually a second test that failed and immediately morphed into a crash.

A particularly dire bear market ensued in this case – by the summer of 1932, the market had lost almost 90 percent from the early September 1929 top (peak on Sept. 03 1929: 381.17 points; low on July 08 1932: 41.22 points).

 

1990 –  A Similar Pattern and Trend Line Break Precede the Crash in Japan's Nikkei

What about non-US equity markets? One of the biggest bear markets of all time has been underway in Japan since 1990. The next chart shows the Nikkei 225 Index, also including the trend line that served as support in the final years of its bull market advance.

Nikkei 225 with major support trend line, 1987 – 1990; prices decline strongly after the trend line is broken.

Once again prices rose along a well-defined trend line, and once again the rally accelerated into the peak, after which an initial test of the trend line and a rebound followed. On the second test the Nikkei broke through the trend line and a lengthy and severe bear market began. The decline eventually reached a staggering 82% (the low was made in 2009, almost twenty years after the top).

 

When is the Crash Danger Acute?

In summary, there are very strong similarities between the chart formation that is in place right now and the patterns that could be observed at the pre-crash peaks of the DJIA in 1929 and 1987 and the Nikkei in 1990.

This raises the question whether there are also similarities in the temporal sequence of these patterns. Below is a table that shows the time periods between the most important turning points of the patterns in calendar days after the peak.

Time periods between major turning points in past crash patterns

The line designated "initial trend line test" shows how many days it took to decline from the top to the first test of the trend line. In 1929 it took 30 calendar days, but recently it took just 13 days (peak on January 26 2018, first test completed on February 08). In short, the length of time elapsing between these two turning points was quite different in these cases.

The second line designated "peak of rebound" shows the number of days from the top to the peak of the initial retracement rally. In the three historical examples of the US in 1929 and 1987 and in Japan in 1990, it was reached after 37 to 39 calendar days, i.e., these turning points were actually quite close to each other.

Currently this would be equivalent to March 02, March 03, or March 06 (at the moment it appears as though the rebound peak may have occurred on February 26. On Feb 27 the market very briefly traded above the range of Feb. 26, but closed lower).

The last line, designated "break of the trend line", shows how many days elapsed from the peak to the second test, when the trend line was broken and the crash wave began. It is interesting that this happened between 45 to 53 calendar days after the respective bull market peaks of the three historical examples.

Important trend line acrobatics… [PT]

Once again these events happened quite close to each other; the time interval between the top and the failing retest was almost of the same length. Currently the equivalent time interval would target the time period from March 12 to March 20 for the retest.

More important than the precise number of days is the break of the trend line as such though. For instance, in the sharp decline in 1998 no such trend line break occurred, after the benchmark indexes had rallied along similar well-defined uptrend lines for a very long time;  the strong advance in prices quickly resumed.

 

The Preconditions for a Crash are in Place

Readers may well wonder why such strikingly similar price patterns tend to occur at all.There are probably psychological reasons for these similarities. At first prices rise steadily over a lengthy time period, until euphoria (and the "fear of missing out") lead to an acceleration of the rally, producing a major peak. Such a phase could be observed in January of 2018, when   the ratio of bullish to bearish advisors according to Investors Intelligence reached an all time high.

What then happens is the opposite of what most investors expect, as prices suddenly decline sharply; initially the pullback tests the trend line successfully. This is what happened in early February this time. By the time the trend line comes into view, sentiment has pivoted completely and has become very bearish, which promptly triggers a rapid rebound. Investors quickly become optimistic again, which paves the way for the decline to resume.

In short, expectations are suddenly disappointed at every turn. The subsequent retest of the trend line is the decisive moment though. If it is broken, there is a significant danger that a crash will ensue. Its psychological function is to thoroughly destroy the faith of investors in perennially rising stock prices.

Will a crash happen this time as well? Crashes happen only very rarely after all – depending on one's definition, one could well say that a real crash happens perhaps once every few decades. However, the factors discussed above suggest that crash probabilities must at the very least be regarded as elevated in coming weeks.

The beast is ever so slightly bruised, but far from vanquished… Crashes are indeed quite rare, and nigh impossible to predict, since sharp run-of-the-mill corrections that don't end up violating important trend lines cannot be differentiated from those that do ahead of the event. But when a combination of several factors that are known preconditions for crash waves is in evidence, then it is definitely worth to consider the possibility. It is irrelevant that crashes are "normally" rare events. For one thing, they are less rare when the above discussed confluence of price patterns, sentiment and valuations is present; and secondly, if a low probability event harbors very large expected effects, it is definitely a good idea to actually be prepared and have a plan. Why risk ending up as yet another deer in the headlights? The landscape will already be well stocked with those if push actually comes to shove. [PT]

Wall Street Responds To Italy's Vote: "Anti-Establishment Forces Are On Fire"

Just like in the recent elections in Germany and Austria, Italy's anti-establishment groups Five Star Movement and the Northern League surged - or "are on fire" as Barclays put it - in Sunday's election as voters punished the mainstream parties for years of economic decline, rising taxes and a wave of immigration, casting doubt over the country's future political direction.

While final results are still due, preliminary results released by Italy's interior ministry show the center-right coalition winning about 37% of the parliamentary vote & the 5-Star Movement getting about 31%, with the center-left coalition far behind with 23%, prompting former Prime Minister, PD's Matteo Renzi, to announce his resignation as party leader. Negotiations to form govt will likely be long & fraught.

According to some pundits, the vote outcome was the worst possible, and the resulting hung parliament will lead to "prolonged deadlock and eventual snap polls" resulting in policy paralysis and protracted uncertainty, i.e., "The Ugly (II)" outcome laid out below.

Still, according to Wall Street the outcome was not too shocking and certainly not a reason to dump one's Italian exposure just yet. Courtesy of Bloomberg, below is a round-up of investors and analysts' views of Italy's election.

GOLDMAN 

The official result of the Italian general election is yet to be announced. We expect a formal announcement later this morning. The latest electoral projections suggest that no major party or electoral coalition will win an absolute majority of seats in the Lower House and Senate. We expect a bumpy and potentially long period before a new government is in place. In the meantime, the current government will remain as a caretaker. The formation of a new government will come only after a period of negotiations among all political forces. New elections, perhaps in a year's time, could also be a possibility. 

In our view, the inconclusive Italian vote has negative "medium-term" implications for stability in the Euro area and thus for markets. Even though the prospect of a caretaker government could diffuse tensions for now, the Italian vote suggests little appetite for economic policies that would keep the Italian fiscal deficit under the 3 percent Maastricht limit, for example. This will create tension between Italy and its European partners. More generally, the composition of the new Parliament will not be seen as favourable by those partners, especially in northern Europe. We expect the northern Europeans to demand more risk reduction at the national level before further steps towards integration and risk sharing can be made across the EU. The Italian Parliament will likely oppose the former. 

JPMORGAN 

Equity strategist Mislav Matejka writes in note: "Italy remains our top country pick, and we would use any politics-driven softness as an opportunity to add." 

MORGAN STANLEY 

"With no absolute majority emerging, the parties have the option of negotiating a coalition – an uncertain process," economist Daniele Antonucci says in note. "Policy continuity looks likely while this happens, but limited reforms could leave the economy vulnerable when the cycle turns." 

JPMORGAN ASSET MANAGEMENT 

The results were partly in line with expectations, while also some surprises with potential implications for markets also emerged, market strategist Maria Paola Toschi says. "The market reaction was very muted this morning, with the BTP showing a moderate move." The reasons may partly be due to some aspects of the outcome already being incorporated by investors such as low governability, no majority and the need for additional consultation/coalitions. Still, "the extreme scenario of a populist government seems a remote possibility, which is good for markets." 

MARZOTTO SIM 

"Anti-establishment parties did better much better than expected, something which should not be taken positively by the market," CEO Jacopo Ceccatelli says. He sees "a mild negative reaction" with some weakness and volatility, though would be surprised "if huge or very significant." 

MEDIOBANCA 

While the election hasn't not brought to an outright majority as expected, the biggest surprise was the stronger-than-expected results of anti-establishment Five Star and Lega, "something that is unlikely to please the market and EU partners," analysts Javier Suarez and Andrea Filtriwrote in a note. They expect some short-term volatility with defensive sectors (utilities & infrastructure, consumers & towers) outperforming high beta/pro- cyclicals sector (banks and industrials) 

UBS WM 

"We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets," Matteo Ramenghi, chief investment officer at UBS Group AG's wealth management unit in Italy, said in a note. A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline while repeat elections could prolong uncertainty and weigh on Italian assets. He added that the Italian equity market hasn't priced in electoral uncertainty, though current yields on government bonds suggest they have incorporate some political risk. 

MAKOR CAPITAL MARKETS 

It seemed clear that we would end up with a hung parliament, strategist Stephane Barbier de la Serre said. "Given that we're still waiting for the final numbers, it's too early to draw any conclusion in terms of market impact because we don't know much at this point. But all in all, I don't think this will be a game changer for Italy, and that's what's matters for markets." 

NORDEA 

Populist parties performed strongly, while no single coalition seems able to reach a majority, chief strategist Jan von Gerich said. Financial markets are expected "to show some worries but no bigger panic ahead." While the Five Star and the League did better than expected, the chances of these two parties forming a government are "remote, so market worries should be only limited for now." The positive cyclical momentum in the economy and continued ECB support "act as a buffer." Confirmation of a grand coalition government from Germany is positive factor for financial markets and also diminishes the net market impact. Still, expects to see some worries especially in Italian government bond markets and equity markets." 

BARCLAYS 

Anti-establishment forces are "on fire" while the prospects for a government are very uncertain, economist Fabio Fois said. He expect "a wide and heterogeneous" coalition that could include anti-system parties, which is unlikely to deliver "meaningful" structural reforms, and, depending on its composition, there are risks that previous reforms could be unraveled. 

Source: Bloomberg