Fidelity - Perspectives: A hot Italian summer

The UK’s referendum vote to leave the EU gave a boost to nationalist and populist parties, triggering a rise in political uncertainty across Europe.

While the Spanish election result shortly afterwards reassured markets, this is likely to be just a temporary calm, as Italy, and Italian banks, move onto the radar as the next source of political shockwaves.

Prime Minister Renzi’s attempt to renegotiate EU conditions of a financial sector rescue package puts him in direct conflict with EU counterparts. In addition, Renzi faces a crucial vote at home in October which could lead to a change in government.

As political risks rise, Italian government bonds will come under pressure and underperform other peripherals. Bank bond investors will however fare better than equity holders, as long as systemic issues are fully resolved.