Italian Stocks Fall as Elections Result to Political Uncertainty

European shares edged higher on Monday but was restrained by weaker Italian stocks, as results of Sunday’s elections only delivered political uncertainty in Italy.

Blue-chip index FTSE MIB declined by 1.3 percent to €21,624.50, after losing more than 1 percent that marked its six-month low earlier in the session.

Italian banks, which are seen as proxy for political hazard due to their high government bond holdings, fell 2.9 percent to €11,534.47, its lowest in almost two months.     

Chief Information Officer Matteo Ramenghi said that they expect lengthy discussions after the elections, which may result to greater volatility of Italian assets. The pan-European STOXX 600 gained 0.4 percent to $368.68, after also hitting a six month low at the open.

Germany’s DAX added 0.3 percent to €11,957.84, reducing losses during early morning deals. The index was down by 4.6 percent last week. 

France’s CAC 40 declined by 0.1 percent to €5,130.60, while UK’s FTSE 100 was down by 0.05 percent to £7,063.50.

Italy Faces Political Uncertainty

Italy seems set to face a long period of political uncertainty and an unstable government as Sunday’s national elections hit a stalemate.

Voters chose to support anti-establishment and far-right parties in record numbers, turning down traditional parties and leaving Europe’s third-largest economy with no sole leader. The outcome has also raised the possibility of a Euro-skeptic alliance.

Finance expert Marco Elser stated that a coalition between the two populist parties would be like a big bomb for the Italian market, but he believed that it is not going to happen.

The anti-establishment Five Star Movement (M5S) grew to be Italy’s biggest single party, even though center-right political party Forza Italia, which includes former Prime Minister Silvio Berlusconi, got the largest part of votes.

According to the country’s new electoral law, if no party or bloc acquires majority of votes, Italian President Sergio Mattarella would select the party or coalition that will form a government post-election.

Earlier outcome of the elections suggested that no one party or alliance would reach majority to allow it to lead alone. 

Government vote data on Monday morning showed center-right bloc with about 37 percent vote, while M5S got 32 percent. The center-left alliance, which includes the Democratic Party, took a 23-percent hit.

The center-right coalition between Forza Italia and right-wing party Fratelli d'Italia is on track to achieve 40 percent majority. If successful, the alliance will be headed by Euro-skeptic Lega party leader Matteo Salvini.

If the election ends up a hung parliament, then weeks of negotiations between the parties await. The country’s constitution indicates no deadline for parties to reach an agreement or call for a new election.

European politicians are also anticipating the result, as it could push Italy to take a more serious and oppositional approach to the European Union (EU) and the common currency.

Head of policy and research in the Official Institutions Group (OIG) Elliot Hentov said the fact that most of the votes were obtained by parties outside of the mainstream was likely a warning for markets that Italy’s and Europe’s challenges remained unsettled.

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