In spite of a very supportive monetary policy backdrop, Italian shares continue to struggle amid long-running weakness in major fundamental indicators for the nation. A combination of austerity measures and stubbornness in the government have effectively choked off any possibility of fiscal stimulus to help rejuvenate an economy struggling under the burden of crippling debt and high unemployment.

When it comes to equity performance, the Italian FTSE MIB continues to disappoint investors as weak component returns and miserable performance from the banking sector drag down the entire index. With few positive developments both domestically and internationally to drive valuations higher alongside a troubling outlook for growth, the pressure on the FTSE MIB remains high as investors endure the ongoing bear market in equities.

Structural Weakness Prevails

When examining Italy under a microscope, it becomes clear that in the years following the sovereign debt crisis the government has failed to implement fiscal and structural reforms to tackle high unemployment and weak productivity. Although the lower Euro has been extremely beneficial for the export economy, problems like high levels of nonperforming loans across the banking sector remain unaddressed.

As far as the weakest sector, the financial sector has been chief among the reasons behind the shockingly poor performance of the FTSE MIB. The index has slumped -22.60% over the last year and remains solidly entrenched in a bear market, trading not far from 52-week lows. To underscore this point, 75.00% of the index’s components have shown negative returns during the same time period. Even though the accommodative monetary policy backdrop remains highly supportive for equities, the MIB has not felt the tailwinds.

Political indecision

The Five Star Movement headed by Italian comedian Beppe Grillo is no laughing matter as recent polls suggest following the strong performance in the Rome Mayoral contest.

The most recent local election results shows that Prime Minister Mateo Renzi and the political establishment are losing control in the wake of poor economic performance, corruption allegations, and the sustained support of austerity-driven policies which are stymieing growth in the nation.

Political indecision remains a major source of downside risks for the economy which has seen government debt-to-GDP levels balloon over the last few years to the current 132.70%, second only to Greece in the Euro Area.

Unemployment remains startlingly high at 11.70% where it has sat for 4 of the last 5 readings amid no fiscal policy response. Additionally, wage growth has effectively stalled, hurting the outlook for headline consumer prices which have remained firmly in deflationary territory on annualized basis for the last four readings.

With the government’s position already weak, implementing stimulus remains a distant prospect, further denting the economic outlook for the nation. Besides the fact that the government is already running a budget deficit, the labor market softness and flat-lining wage growth gives little support to GDP growth which remains below comparably Euro Area figures. Implementing pro-growth initiatives alongside measures to alleviate the banking system’s nonperforming loans might enable Italy to turn a corner, propelling equities higher. However, based on prevailing conditions, these types of measures are highly improbable at the current juncture.

Technically Speaking

From a charting perspective, the FTSE MIB performance over the last few months has shown the bear market remains alive and intact as the index slides back towards multi-year lows. Aside from the double top formation at resistance of 18960 which emerged back in April after the index failed to overcome March highs, the moving averages continue to support the prevailing bearish bias. With both the 50 and 200-day moving averages trending lower above the price action, each is acting as resistance against an upside pullback, with the longer-term downtrend resuming momentum lower towards multi-year lows sitting at 15777.Should price-action fall below this next key support level it would pave the way for further losses in the FTSE MIB.

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Even though many of the indicators are underlining the prevailing bearish sentiment, the recent momentum lower might be approaching a pullback as evidenced by the relative strength index and relative vigor index. With the RSI already trending in oversold territory, a signal line crossover in the RVGI might suggest a temporary reversal and correction higher in the index over the short-term before a resumption of the trend. Based on the Fibonacci levels, a bounce towards 17000 or as high as 17800 would reasonably fit the conditions for a technical retracement of a trend. However, on a more medium-term basis, the bearish bias remains intact barring an uptick in Italian fundamentals or a fiscal stimulus announcement.

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Looking Ahead

For the FTSE MIB to snap out of the enduring bear market the Italian government will be forced to tackle issues on head on ranging from structural unemployment to nonperforming loans that are preventing a stronger recovery in banking and lending. While the financial services components of the index are among the weakest performers, should the country head in the direction of fiscal stimulus it could reverse the underperformance which threatens to drive the index to new multi-year lows. However, absent action, the FTSE MIB is likely to continue disappointing investors as companies struggle to grow in a challenging political and economic environment.