There’s a more important court decision that investors should be looking at

Chris Ratcliffe | Bloomberg | Getty Images

Investors looked at the U.K.'s Supreme Court this Tuesday morning waiting for clarity on how messy the start of Brexit negotiations could be. However, the focus should be targeted further south.

Italian judges are to announce Tuesday or Wednesday their opinion on a proposal to update the country's electoral system. Their decision has a direct impact on how long the current political instability in Italy will drag on.

"Although the main market focus today is on the United Kingdom as far as court decisions are concerned, an ongoing constitutional court hearing in Italy has the potential to have a much greater impact on the future wellbeing of the EU," Alastair Newton, co-founder and director of Alavan, said in a note.

"Investors would therefore do well to keep a very careful eye on Italy and not allow themselves to be distracted totally by the ongoing election battles in France and The Netherlands, let alone Brexit," Newton added.

The proposals to update the Italian electoral system aim mainly to make clearer the winner in general elections.

President Sergio Mattarella wants the electoral law approved before he calls a snap election.

Italy is currently being governed by an interim government after former Prime Minister Matteo Renzi resigned after losing a referendum vote last December.

Analysts believe that if the court votes in favor of the changes, Italian voters could head to the polls as early as this summer.

"With anti-establishment sentiment and euroscepticism currently strong, this could result in a government committed to hold a referendum on Italy's membership of the euro zone," Newton added.

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Recent polls showed the ruling center-left PD party and the Eurosceptic Five Star Movement statistically tied, Newton said.

If the court asks for amendments to the electoral law, elections could be postponed until 2018.

"If the court flatly rejects the Italicum (electoral law), negotiations among parties could drag on for quite some time, raising the chances that elections will take place in early 2018 after the end of the current parliamentary term," Wolfango Piccoli, co-president of Teneo Intelligence, said in a research note.

"One factor to watch will therefore be the question to what extent the ruling will leave Italy with a working electoral law without the need for significant further amendments to be approved by parliament," Piccoli said.

"The wider the gap between what is left of the Italicum and the existing electoral law for the senate, the more difficult it will be to forge the political consensus required to approve a new electoral law for both chambers, thereby extending the timeline for possible snap polls," Piccoli added.

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