Some reaction to the news that the Italian government negotiations haven’t quite reached the fulltime whistle....

The rumour mill in Italy has been working overtime, as politicians, analysts and the media speculate about the identity of Italy’s new prime minister.

The FT has the details:

Ahead of the meeting between [M5S’s] Mr Di Maio and Mr Salvini [of the League], Rome was gripped by rumours of possible candidates.

Il Corriere della Sera, Italy’s leading daily, said there was a horse race between Giulio Sapelli, an economic historian and a former board member at Eni, Italy’s largest oil and gas group, and Giuseppe Conte, a jurist from Puglia and an expert in public administration.

Mr Sapelli’s star seemed to be on the rise after he said that he had been contacted by the parties and had offered his full availability for the job, if Domenico Siniscalco, the former finance minister, returned to his old job. But Five Star officials then said Mr Sapelli would not be selected as prime minister.

This triggered new speculation that Mr Di Maio himself might clinch the post, but Mr Salvini denied it as he entered the meeting with the Five Star leader.

Newsflash from Rome: Italy’s two populist parties haven’t reached a deal yet.

An agreement could still be a few days away, according to M5S’s leader Luigi Di Maio....

Newsflash from Washington: the International Monetary Fund has announced that its board will consider Argentina’s request for help on Friday.

Gerry Rice, the International Monetary Fund’s spokesperson, says:

“IMF staff are continuing discussions with the Argentine authorities toward a Fund-supported program. Our shared goal is to reach a rapid conclusion of these discussions. An IMF Board meeting on Argentina is scheduled for Friday, May 18. This will be an informal meeting, as part of our usual process of briefing the Board on negotiations for high access IMF programs.”

Last week, Argentina announced it is seeking a $30bn precautionary credit line to shore up the peso, which has slumped in recent weeks.

It’s quite a move, almost 20 years after the government threw out the IMF amid a massive financial crisis.

The US stock market has indeed opened higher, with the Dow Jones industrial average gaining 95 points or 0.4% to 24,926.

Traders are hopeful that US-China trade tensions are easing, following Donald Trump’s olive branch to China’s telecoms firm ZTE.

Reuters has more details about how Movement 5 Star and the League’s policy pledges could blow a hole in Italy’s budgets:

Five-Star’s flagship policy of a universal income for the poor would cost an estimated €17bn ($20bn) per year. The League’s hallmark scheme, a flat tax rate of 15% for companies and individuals, is tipped to cut tax revenues by €80bn per year.

Scrapping an unpopular pension reform would cost €15bn, and another €12.5bn would be needed to head off an automatic hike in sales tax due for next year.

Tax cuts might give Italy a growth boost, though, while universal basic income could help tackle inequality and encourage people to retrain and get back into the labour market.

Back in the UK... and fans of Poldark will be interested to learn that Cornwall could soon have a working metal mine again.

My colleague Julia Kollewe explains:

Tin mining is set for a comeback in Cornwall, as a Canadian company that plans to reopen the South Crofty mine in 2021 announced it would float on the London stock market next month to help fund the venture.

Vancouver-based Strongbow Exploration acquired the rights to the tin mine in the Cornish town of Pool in July 2016. After operating for more than 400 years, South Crofty was the last tin mine to close in the UK 20 years ago, due to a lack of investment and falling metal prices.

But since then demand for tin has increased while global supply is falling, driving a 60% surge in tin prices since January 2016 to $21,000 (£15,457) a tonne. Tin is used as solder in consumer electronics and other electronic devices, electric cars and solar cells.

The US stock market is expected to open a little higher today, with the Dow called up 60 points.

Italy’s stock market has dropped a little further into the red, as traders in Milan brace to learn who their next prime minister might be.

The FTSE MIB has shed 150 points, or 0.65%, today to 24,005.

Overnight, Asian markets had rallied with Hong Kong up 1.3% and Japan’s Nikkei gaining almost 0.5%.

Mihir Kapadia of Sun Global Investments thinks the European markets may be getting a little jittery:

Despite the gains made in Asia, European markets started off on a cautious tone as increasing global tensions played a part in the decline.

With Italy struggling to form a government and the UK government facing internal struggles to cope with Brexit, banking and technology pulled Stoxx Europe 600 lower over the sentiment.”

The growing possibility of a populist government in Italy is just one reason why the markets could be choppy in the months ahead.

Brexit, the trade talks between the US and China, and geopolitical tensions in the Middle East are all potential triggers for a selloff too.

Mark Haefele, chief investment officer at UBS Global Wealth Management, warns that some investors aren’t ready for the challenges ahead:

The period of exceptionally low volatility that investors enjoyed in 2017 is over.

2018 has seen a number of risks surface that could end the economic cycle, triggering a bear market in global equities, or at a minimum, leading to even higher market volatility. Investors need to respond. Based on our analysis of our own positioning data, many investors are entering this higher volatility environment unprepared.”

So, is it time to sell up? Haefele says not...

“The road ahead will be more difficult to navigate than the road that’s behind us. Returns will likely be lower – we’re assuming annualised equity market returns in the mid-to-high single digits. But we don’t believe a pick-up in volatility signals the end of the bull market. This is not a time to jump to cash. The cost of being uninvested remains high.”

The news that Italy’s president will meet the party leaders in the mid-afternoon hasn’t given the markets a jolt.

After nearly four hours of trading, the European trading floors remain calm with the main indices slightly lower.

As well as Italy, investors are also pondering what to make of Donald Trump’s latest move.

The US president surprisingly tweeted yesterday that he was trying to save jobs... in at a Chinese telecoms firm.

It’s a remarkable twist, given Trump’s claims that Chinese firms have been unfairly taking jobs away from America.

It’s particularly odd, as ZTE is in hot water for violating US sanctions by illegally shipping American technology to Iran and North Korea. This prompted a a ban on US companies selling components to ZTE, after the US commerce department concluded that ZTE was not complying with an agreement over the sanctions-busting.

Trump’s decision to spring to ZTE’s aid may signal that relations with China are warming up - perhaps Beijing wants the ZTE issue resolved before reaching a wider deal on trade reform.

Jean Pisani-Ferry, senior fellow at the Bruegel think tank, says Italy’s next government needs to take urgent action to improve its economy and boost productivity.

Pisani-Ferry points out that Italy’s financial position is precarious, with a debt-to-GDP ratio of 132% (ie, Italy owes more than its entire annual economic output).

But that’s the product of weak growth, not reckless borrowing, he explains:

The root of Italy’s public-finance problem is that it inherited excessively high debt from the 1980s and has not recorded significant economic growth for two decades. Real (inflation-adjusted) GDP in 2017 was at the same level as in 2003, and real GDP per capita was at the level of 1999. With a stagnant denominator, it is hard to reduce the debt-to-GDP ratio: the legacy of the past continues to weigh excessively on the present.

A thought experiment helps in understanding Italy’s problem. Had France followed the same policy as its southern neighbor since the launch of the euro in 1999 – that is, had it recorded, year after year, the same primary balances – its public debt today would be 45% of GDP, instead of 97%. The difference between the two countries is not that France has been wise and Italy profligate. Quite the contrary. The reason why France has a significantly lower debt today is that it inherited a better fiscal position and has been growing faster.

The lesson, therefore, is that Italy’s key priority should be to revive growth. But this cannot be accomplished by relaxing the brake on public spending. The bulk of Italy’s growth problem comes from the supply side, not the demand side. As documented in a recent paper produced by the Bank of Italy, the country’s productivity performance is truly dismal: over the last two decades, output per employee has decreased by 0.1% per year, compared to 0.6% growth in Spain, 0.7% in Germany, and 0.8% in France. Furthermore, the demographic outlook is frightening: the working-age population, currently at the same level as in the late 1980s, is set to decline by 0.5-1% annually in the years to come. The burden of repaying the debt will fall on a smaller labor force – even more so if the retirement age is lowered....

More here.

Economist Daniel Lacalle agrees that the European Central Bank is holding down eurozone bond yields - but I don’t think he approves.....

Peter Rosenstreich of online bank Swissquote thinks investors are too complacent this morning:

Political risk is building in Italy, and markets are ignoring it.

Yield spreads failed to react to news that the Northern League and 5-Star parties have reached a tentative coalition. This might have dramatic implications for Italian government spending: but the Euro continues to firm against the US dollar.

The European Central Bank can also take some credit for today’s calm markets.

Back in 2011, Italy’s borrowing costs hit dangerous levels during the political crisis that forced Silvio Berlusconi out of office. Since then, the ECB has launched a series of schemes to shore up the eurozone, including its huge QE bond-buying programme.

That asset purchase scheme has driven eurozone bond yields (the cost of borrowing) down to record low levels. The ECB says the programme is meant to stimulate growth and fight deflation, but it is also acting as a safety net for the eurozone.

Kit Juckes of French bank Société Générale says:

As long as the ECB has the bond market’s back, the euro will try to ignore Italian politics.

Newsflash: Italian president Sergio Mattarella will meet with the leaders of Movement Five Star and the League this afternoon.

Mattarella must judge whether a stable government can be formed, avoiding the need for new elections.

Over in Milan, the Italian stock market has dipped by 60 points, or 0.25%, to 24,101 points.

One theory for the muted reaction is that any alliance between M5S and the League will soon collapse, triggering new elections.

Robin Bew of the Economist Intelligence Unit thinks Italy may soon be heading back to the polls....

Rebecca O’Keeffe, head of investment at interactive investor, suspects those new policies could be unaffordable.

She writes:

After lengthy post-election negotiations, the populist Five Star Movement is poised to join a coalition government with the extreme right-wing League.

So far, their headline policy proposals include lower taxes and earlier retirement. Italy has struggled for decades with government deficits and resultant inflation, and there is a clear danger that the country’s finances may, yet again, be about to spiral out of control.

The draft programme being drawn up between the two parties may include some popular policies.

According to Bloomberg, it includes “a flat tax as low as 15 percent, a guaranteed income for the poor and a lower retirement age”.

This implies a certain degree of fiscal loosening, which might see Italy exceed its current borrowing targets.

Bloomberg says:

The parties’ economic program costs between 65 billion euros and 100 billion euros, according to an estimate in newspaper Corriere della Sera on Monday, adding that the flat tax is the most expensive measure.

The euro has actually risen this morning, up 0.3% against the US dollar at $1.198.

That indicates that the markets aren’t spooked about the situation in Italy.