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What if the former ECB boss Mario Draghi becomes Italian president and leaves his prime minister job?

Now it’s worth asking, as Draghi said on Wednesday, he would be willing to become head of state when the position falls free early next year. read more

Some analysts warned about a potential increase in Italian risk premium as Draghi's arrival in February 2021 has boosted confidence in the country's debt-ridden economy. But things might be different.

He calls the first one “business as usual.” Draghi could appoint a senior minister from his cabinet as his successor, and “Italy could enjoy a relatively stable politics in 2022 upon the start of Draghi’s seven-year reign as president.”

The most worrying scenario for investors in Italian assets is the second one: snap elections. “With polls projecting a substantial draw, parliamentary elections held in late spring could open a new period of political uncertainty,” he says in a research note.

“In a third unlikely scenario, Draghi could refuse to call early elections, leaving the caretaker cabinet in charge,” if the Parliament disagrees with his claim that the government can continue without him personally heading the cabinet, he adds.

The pandemic is stealing the stage once again, with some positive vibes for risky assets driving European stocks higher after a study suggested reduced risks of hospitalization and severe disease with the Omicron variant.

The STOXX 600 (.STOXX) is up 0.2%, with the travel and leisure stock index (.SXTP) -- which is the most sensitive to the risk of pandemic restrictions -- leading gains, up 1.9%.

Autos stock index (.SXAP) is up 0.8%, with Continental stocks (CONG.DE) among the best performers after the CEO Nikolai Setzer was quoted as saying the company could hit the upper end of its profit margin outlook in 2021.

Analysts remain cautious about the medium-term impact of Omicron as a potential reduction in hospitalisation needs to be balanced against the larger risk of infection.

Omicron spreads faster than Delta but is less likely to land you in hospital. The UK now has more than 100,000 cases of Omicron. China's Xian city has locked down 13 million residents. But a third Astra Zeneca shot offers protection. And so on.

But... whatever. Markets seem to be reposing their trust in companies, politicians, central bankers and doctors to ensure Omicron doesn't get in the way of fat investment returns and economic recovery. Wednesday's U.S. data painted a picture of a highly resilient economy expanding at the fastest since 1984.

Even Japan upgraded growth projections for the next fiscal year starting in April to 3.2% versus the previous 2.2% forecast.

For U.S. equity investors at least the COVID years have been a time of scintillating returns; the S&P 500 (.SPX) is is up 25% in 2021 and 87% since end-2018. This year alone the biggest five lockdown beneficiarines have added almost $4 trillion in market capitalisation. Just to compare, the entire global equity complex is up $10 trillion.

Markets seem to be winding down for the year however; stock futures are flatlining, the dollar is near one-week lows.

Even the Turkish lira is staying calm for now and its sovereign risk insurance costs have declined in the CDS market. They remain however some 400 basis points above similarly rated South Africa.

Key developments that should provide more direction to markets on Thursday:

European stock futures are in positive territory after hopeful developments about the Omicron variant in typically thin holiday season trading.

Research by London's Imperial College said the risk of hospitalisation for patients with the Omicron variant of COVID-19 is 40% to 45% lower than for patients with the Delta variant. However, the reductions in hospitalisation must be balanced against the larger risk of infection

Also, a batch of U.S. economic data released Wednesday suggested the economy would continue to expand in 2022.

All that is providing support to risk sentiment. One must recall however that the unpredictable path of the pandemic and its impact on the economy are bound to keep investors on edge well into next year.

Source: Reuters

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