Exit polls in Italy revealed a sweeping gain for the populist parties as the Five Star Movement (M5S) won 32% of the votes – the largest number for a single party – and the far-right Northern League gained 17%.
The ruling centre left lost ground after the Democratic Party, led by Matteo Renzi, secured just 18.9% of the vote. Meanwhile, ex-Prime Minister Silvio Berlusconi’s centre-right Forza Italia party landed 14%.
A coalition formed of the Northern League and Forza Italia appears set to win most seats in the lower house of parliament.
The euro dropped 0.7% against the US dollar following the exit polls, having spiked earlier on news that Angela Merkel will keep her position as German chancellor for a fourth term.
Timothy Graf, head of macro strategy for EMEA at State Street Global Markets, said after a benign 2017 for eurozone political risk, the strong performance of the Five Star Movement brings these threats very much back to the forefront.
He added: “Though M5S officials have toned down anti-euro rhetoric in recent months, the euro-scepticism within the bloc could ultimately re-introduce the existential threat to eurozone stability long thought diminished.
“Forming a government has many challenges, but this result could dent the strong consensus support the euro currently enjoys. Italian bond spreads also have scope to widen modestly from current levels.”
However, Columbia Threadneedle head of global rates and currency Adrian Hilton said while the result looks “messy”, the chances of Italy leaving the eurozone have not gone up materially.
He said: “The arithmetic of government-formation won’t be clear until we know how the parliamentary seats will be distributed. Neither Five Star nor the centre-right (LN/FI) coalition can govern alone, but it seems likely that the future administration will feature one anti-establishment party or another.
“The reaction of bond markets has been fairly restrained so far.”
Hilton said the really negative outcome for markets would be a coalition comprising both the Northern League and Five Star.
“Such a scenario would probably worsen relations with the European Commission, especially around fiscal targets,” he added. “But we are a long way from Italy ditching the euro: both anti-establishment parties have toned down their euro-scepticism in recent months and surveys continue to show a popular majority in favour of membership of the single currency.”
Ian Ormiston manager of the Old Mutual Europe (ex UK) Smaller Companies Fund, said the results represent a vote against the establishment. And in the case of the North League – a vote against immigration, austerity and the European Union.
“The results should unnerve global investors, and the euro will continue to weaken,” he added.