The flare up of European populism and its investing implications
Italian politics have revived market attention to the risk of European fragmentation, adding to already heightened global economic uncertainty. Yet our base case is still that global growth will be sustained amid gradually rising interest rates. We see a structural discount on some European assets being confined to the region for the near term. We still like U.S. and emerging market (EM) stocks. The proposed nomination by Italian populist parties Five Star Movement (M5S) and the League party of a finance minister hostile to the euro and the prospect of new Italian elections prompted major market angst. See the chart below. Italian 10-year borrowing costs relative to German bonds soared (the light blue line). The contagion extended to the euro-zone periphery, pushing bond yield spreads sharply wider (the green line), and to global markets. The U.S. dollar surged against the euro, and U.S. 10-year yields fell in a flight to safety. A last-minute agreement on a less overtly anti-euro cabinet restored confidence, and these moves mostly reversed late last week. See the far right of the chart. Yet we see political uncertainty holding down equity valuations and keeping credit spreads wider across Europe, including on peripheral sovereign debt. The prospect of new political leadership in Spain adds to the uncertainty.
Confrontation timeGeopolitical risk dashboard European fragmentation risks Weekly commentary Richard Turnill is BlackRock's global chief investment strategist. He is a regular contributor to The Blog .
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