Waiting for Mattarella

There will be a great deal of posturing and declarations, but the following yesterday's election, the next step is in President Mattarella's hands.  He is to nominate a candidate for prime minister who has the best chances to win a confidence vote in both chambers of parliament.  Formal consultations may not begin until next month.  

These elections for the first under the new law, which seemed to put more emphasis on coalitions than parties, to facilitate stronger governments. However, many are still emphasizing parties as the key unit.  This difference is important.  If it is in terms of political parties, the Five Star Movement(M5S) received the most votes with about 32.4%.  However, the center-right coalition had 37.3%. 

The M5S had rejected coalitions in the campaign and the immediate aftermath, but many seem to discount this.  M5S leader Di Maio says that his party now "feel the responsibility to form a government" and that he was "open to discussion with all political actors." On paper, the North League's 17.6% of the vote and M5S 32.4% could potentially secure a major of seats.  Northern League leader Salvini ruled out forming such a coalition with the M5S.  

That said, the most likely scenario is a center-right and a center-left coalition.  However, the center-left (PD) did miserably, garnering a little less than 19% of the vote.   Renzi, former Prime Minister and currently the head of the PD may be the first casualty.   He has scheduled a press conference for 5 pm local time (11:00 ET) and may resign.   

Berlucsoni looks to be a casualty as well.  His party, Forza Italia, came in fourth with about 14% of the vote.  The first implication is that Berlusconi cannot claim to lead the center-right coalition.  He cannot hold office and the poor electoral showing may mark the end of an era in which dominated Italian political scene after the "Clean Hands" investigation decimate the older political elite and parties.  

Salvini, who clearly wants to be Prime Minister, is touting a more hostile line toward the EU and euro and the M5S.  Salvini had tempered some of his rhetoric during the campaign, but warned today that EMU was bound to come to an event, and Italy needs to be prepared.  M5S leader Di Maio has softened his anti-EU and anti-euro flourishes. 

It will take some time to sort things out in Italy, but this seems to be par for the course in Europe.  Unless investors conclude that the Italian election results do challenge the euro and/or EU, the euro will likely be driven by other issues, including this week's ECB meeting. The Italian election may be in the same bucket of factors as the Catalonia's election in Spain.   It has been several months since the election.  The regional government is not in place.  Yet, it is seen as local challenge and not one that is an important driver of Spanish assets on a day-to-day basis. 

The near-term cap for the euro is seen near $1.2355, which is the 50% retracement of the decline from the year's high set on February 16 near $1.2555.  Initial support is seen near $1.2260, which is 50% of the bounce from the March 1 low near $1.2155.  

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