A volatile 2019 with the stand-off between Rome and Brussels and the EU elections

13 December 2018

We have reached the end of an extremely complicated year, in which hefty issues like the trade war and the stand-off between Italy and the EU have respectively affected global and domestic performance. Although these last few weeks of the year offer a little light at the end of the tunnel, a few variables continue to create uncertainty, and first and foremost is the outcome of talks with the European authorities about the Italian budget.

After the testy tone of early negotiations, the Italian government has recently appeared willing to seek an agreement and avoid having its bill rejected.

However, if the EU decides to reject the Italian plan, the country could face sanctions, the worst case scenario being that the European bank freezes funds for investments. Indeed, this is the biggest risk.

But markets are what pose the most imminent danger: if the EU rejects its budget, Italy would see its situation worsen – now that the economy has improved thanks to hope of an agreement being reached – with an impact on the spread between Italian treasury bonds and the German Bund and, consequently, the stock market.

Moreover, the European elections scheduled for the first half of 2019 are extremely important for the future of the continent and could change the face of Europe as we know it.

This is why we believe that the first few months of the year could present volatility in connection with the results of the elections, beyond the potential tension arising from Italy’s peculiar position in talks with the EU.

These talks are indeed what could tip the scales for the financial sector after it suffered through such a difficult 2018. As the sector is highly influenced by the spread, newfound tranquillity could boost the performance of financial securities.

By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.