It’s all about the Italian election. What to watch for

Election goes Sunday

A hung parliament is baked into the ravioli at this point. No party or natural coalition is anywhere close to the lead.

The best barometer for the risk is probably Italian stocks. The FTSE MIB is near a big layer of support that stretches back six months.

That’s a daunting chart, especially with the rough head-and-shoulders forming. A break of those lows could easily target 20,000, which is a 9% drop from here.

I would tend to take the other side. It was only a year ago with France where we saw how a market can rally once political fears fade. Buying French stocks on election day was one of the best trades of the year.

There isn’t a clear path forward for Italy but for all the faults of the Italian political system, politicians there have a remarkable ability to avoid stalemates.

Expect exit polls shortly after 2200 GMT on Sunday, when polls close. That’s just as the forex market opens for the week.

In terms of euro reaction, I just don’t see how it’s a big event. There is dysfunction all over Europe with Spanish and Dutch governments recently crippled. Risks of an exit from the euro have drastically diminished and no one is campaigning on it.

The worst is probably priced in and, if anything, a euro bounce is most likely.

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