A 5-Star-League coalition government is.......>

ITALY: A 5-Star-League coalition government is taking shape in Italy. The devil

is in the details but since the initial knee-jerk leg lower for BTPs after early

election rumblings began, the reception has been modestly market-positive.

- While populist in nature, this government could be populist-lite. Crucially,

ANSA reports that 5S has pledged to respect the EU`s deficit rules, and the

coalition will not seek euro exit.

- The next Prime Minister is set to be a compromise (ie not 5S`s Di Maio or

League`s Salvini), with rumours centring around Giampiero Massolo, ex-head of

the intelligence and securities, former diplomat, and now board chairman of

shipbuilding giant Fincantieri. However, ANSA reports that there is some

internal opposition to Massolo.

- A lot can change over the next few days but the risk is better compensated

than it was a few weeks ago. 10Y BTP spread over Bonos is 35bps up from the

Dec-17 low at 59bps. The post-eurozone crisis high is 76bps.

- Friday`s rally means the 10Y spread over Bunds (132.5bps) remains in its

12-month downtrend. Top of the trend channel is 140bps, bottom 100bps.