Take long-term view when measuring Italian new gov't impact on markets

Key financial markets weakened in the days and weeks leading up to the appointment of Italy's first-ever populist government. But following Friday's installation of Prime Minister Giuseppe Conte and his cabinet, market reaction has been muted.

Analysts warn that if the government fails to act with prudence, this could be the lull before a storm.

Spooked by a proposed government program that included a 100-billion-euro spending spree, a call for the European Central Bank to write off as much as 250 billion euros in Italian debt, and the chance of a possible withdrawal from the 19-nation euro currency zone, investors ran away from Italian financial markets in recent weeks.

The MIB-30 blue chip index lost more than 10 percent of its value in May and the yield for Italy's benchmark ten-year government bonds nearly doubled, reaching their highest levels since 2014. Even the euro currency lost value against the U.S. dollar and other major currencies.

But over the last two trading days -- Friday and Monday -- markets have been calm. Over those sessions, the yield on Italian debt has trended lower, a sign that investors are less nervous about Italy's prospects.

On Monday, the first full trading day since the Conte government was formally installed, MIB-30 traded in positive territory for most of the day before a round of profit-taking that saw the index finish just slightly below Friday's close. The euro even gained against the U.S. dollar.

"It doesn't make a lot of sense to try to draw a conclusion from one or two days of trading, you have to look at wider trends," Francesco Saraceno, a member of the board for the School of European Political Economy for LUISS University, told Xinhua.

Saraceno said there are two possible developments -- both of them in line with the government program from the anti-establishment Five-Star Movement and the nationalist League -- that could still spark another selloff.

"I think if the parties try to speed up the implementation of their program, especially the parts seen as less responsible fiscally, or if they start to play a confrontational role with the European Union, those things could cause some problems," Saraceno said.

Francesco Giavazzi, a professor of political economics with Milan's Bocconi University, said that a more gradual implementation of the program would give markets time to adjust, probably avoiding an extreme reaction. He also said investors could gain confidence in Italy as the government shows it has a plan to pay for the as-yet unfunded 100-billion-euro stimulus.

"If the government goes through with the spending plans and it doesn't raise the money to pay for it, the deficit will reach 4 percent of gross national product and that will cause problems," Giavazzi said in an interview.

While Saraceno, Giavazzi, and other key observers say Italian stock and bond prices can have a direct correlation to government news, it's less likely the euro would move in step with Italian news unless there was a dramatic development.

"The euro is going to move mostly because of relative economic growth," Giavazzi said. "Right now, the euro is weakening because growth in the United States is gaining strength and in Europe, it is moving in the other direction."