Stock markets welcome outcome of US vote, Italian banks lead the rally

The Ftse Mib closed the November 4 session up 2.18%, at 51,031 points, returning to levels last seen a month earlier. Driving the Milan index were banking stocks: Intesa Sanpaolo rose 5.45%, Unicredit 5.48%. The trading day followed by just a few hours the outcome of the United States midterm elections, in which the Democrats secured a victory at the polls.

The reaction on US markets was even more pronounced: Dow Jones futures rose by more than 1,500 points in the hours following the announcement of the election result. A movement of this magnitude in futures, ahead of Wall Street’s regular opening, signals a sudden shift in investor expectations, rather than a marginal price adjustment.

The tone on other European exchanges was different, as they opened Wednesday’s session with modest gains: Paris +0.18%, London +0.16%, Frankfurt +0.09%. The comparison between Milan’s performance and that of other continental exchanges suggests that the Italian rally cannot be explained solely by the ripple effect of the American vote, but also reflects dynamics specific to the domestic banking sector, which benefited disproportionately compared with the rest of the index.

A useful indicator for reading the climate on Italian government bonds is the spread between Btp and Bund, which narrowed to 104.2 points in the same session. A narrowing spread typically accompanies periods of reduced risk aversion on eurozone peripheral bond markets, and in this case it occurred alongside the rise in bank shares, whose balance sheets are historically sensitive to the performance of the national government bonds held in their portfolios.

The correlation between an election result in the United States and a movement of this magnitude in Italian banks is neither automatic nor obvious: the facts gathered do not include an explicit explanation of the transmission mechanism, and this therefore remains a point to be verified in the coming sessions, when it will be possible to observe whether the rally consolidates or proves to be an isolated reaction linked to the pre-election uncertainty that preceded it.

It should be noted that the available sources do not specify the detailed outcome of the vote for control of Congress — which chambers were actually won and by what margin — a detail that affects the ability of the sitting administration to carry forward its legislative agenda over the next two years, and one that financial markets typically price in quickly.

On the sector front, the fact that it was precisely the banks that led Milan’s rally points to a recurring theme in European financial markets: Italy’s credit sector reacts in an amplified way, for better or worse, to shifts in sentiment regarding government bonds and global macroeconomic prospects. The figure of 51,031 points brings the Milan index back to a level already reached a month earlier, indicating that the market had partly priced in, in the preceding weeks, uncertainty linked precisely to the outcome of the US vote.