Yesterday, in the aftermath of the latest Italian political drama, in which president Mattarella openly mocked democracy, and under pressure from Europe vetoed the choice of the euroskeptic economy minister, Paolo Savona, we warned that this outcome was even worse for markets than the one which most had dreaded, namely Mattarella folding and greenlighting the 82-year-old professor for reasons we laid out article from Sunday.
Algos still don't understand that appointment of Savona was "best" worst case scenario https://t.co/EbYlkkHpuw
What happened next was a full court press by so-called experts and momentum reversal algos to spin yesterday's outcome as good news, and sure enough in early trading the EUR bounced sharply, rising above 1.17, Bunds slumped, and Italian bonds and stocks gapped higher at the open.
... And then all hell broke loose when, just as we predicted, Mattarella's decision simply reinforced the League's hard line position, when shortly after the open League leader Matteo Salvini reiterated his support for Savona, and in a Facebook video said that "either EU rules will change or it makes no sense for Italy to remain in the European Union." Worse, dragging Italy to the verge of the constitutional crisis we warned about yesterday, Salvini turned the nation against the Brussels-lackey president and said that Mattarella "chose EU rules over Italians’ vote" which "is an issue for democracy."
And the punchline: the League would still seek to form a government with people rejected by Sergio Mattarella.
In effect, Salvini confirmed what we said yesterday that the stakes in the upcoming Italian elections were just raised exponentially, and are now an outright referendum on euro membership.
Meanwhile, shortly after noon local time, in purely symbolic gesture, the Italian president gave the mandate to form a government to ex-IMF official Carlo Cottarelli, 63, whose task to form a technocratic government has zero chance of success. Cottarelli said that if he is successful in forming a government - which he won't be - the next Italian elections would take place early 2019. If he isn't, and he won't be as all the top parties have already rejected his attempt, the next elections will be in August or shortly thereafter.
"The President has asked me to go before parliament with a program that will bring the country to new elections," Cottarelli said after meeting President Sergio Mattarella.
By this point the market, however, couldn't care less what this meaningless figurehead had to say, as both Italian bonds and stocks were plunging, having realized just why this was the worst possible outcome, and that it was indeed unfolding especially since as Goldman noted last night, if the elections were held today, the 5-Star and the Lega would win over 55% of the vote, a 10% gain...