March 5 (Reuters) - Italy faces a prolonged period of political instability after voters delivered a hung parliament on Sunday, spurning traditional parties and flocking to anti-establishment and far-right groups in record numbers.
Below are some initial reactions:
TIMOTHY GRAF, HEAD OF MACRO STRATEGY FOR EMEA AT STATE STREET GLOBAL MARKETS
"After 2017 ultimately proved benign for euro zone political risk, the unexpected strong performance of the 5-Star (movement) brings these threats very much back to the forefront.
"Though 5-Star officials have toned down anti-euro rhetoric in recent months, the euroscepticism within the bloc could ultimately re-introduce the existential threat to euro zone stability long thought diminished.
"Forming a government has many challenges, but this result could dent the strong consensus support the euro currently enjoys. Italian bond spreads also have scope to widen modestly from current levels."
ALESSANDRO BALSOTTI, HEAD OF ASSET MANAGEMENT, JCI CAPITAL
"The result is certainly among the worst ... that the market could have expected, even though the Brexit and Trump votes have taught us that political happenings can lead to unexpected market reactions.
European integration and the euro have not been a central part of the (Italian) election campaign and the eurosceptic tones have not be stressed a lot by parties such as the 5-Star and the League, which in the past have insisted on the issues with much more conviction. From that point of view it is difficult to imagine that any of the results could have a systemic impact."
DANIELE ANTONUCCI, ECONOMIST, MORGAN STANLEY
"With no absolute majority emerging, the parties have the option of negotiating a coalition an uncertain process. Policy continuity looks likely while this happens, but limited reforms could leave the economy vulnerable when the cycle turns."
PIERRE BOSE, EUROPEAN STRATEGIST, CREDIT SUISSE
"In the immediate aftermath the euro may not move much following the Italian elections, but weakness would be a buying opportunity."
ALBERTO GALLO, FUND MANAGER & HEAD OF MACRO STRATEGIES, ALGEBRIS
"There are so many scenarios that it is hard to say which government will be formed but, if parties avoid stepping back on reforms already done -- because the economy is growing and there are more jobs -- the markets should not worry too much about these results, which were broadly in line with expectations."
LORENZO PORTELLI, STRATEGIST, AMUNDI
"At the moment we do not believe at the hypothesis of a populist government. We are in a very fluid framework and we cannot exclude some type of government with a short-term mandate to reform the electoral law. It is important to underline that, with respect to 2013, both the 5-Star and the League have smoothed their eurosceptic tones: they have focused mainly on immigration and security issues."
ALESSANDRO TENTORI, CHIEF INVESTMENT OFFICER, AXA
"We believe we are heading towards a technocrat government. There is a strong message from the voters, but it did not secure a majority for any of the political parties. I don't expect big movements on markets because an inconclusive outcome was already priced in. It would be different if in the next few hours the possibility of a Europe-sceptic alliance, such as between the 5-Star and the League, materialised, but that seems unlikely."
NICOLA NOBILE, ECONOMIST, OXFORD ECONOMICS
"A vote dictated by gut feelings: it remains to be seen what happens now, whether the (anti-establishment) 5-Star decides to find an agreement with the League or with the PD. At the moment everything is uncertain, and the situation could remain like that until the appointment of the speakers of the lower house and of the Senate. We expect a couple of weeks of absolute uncertainty.
"A parliament without a majority was widely expected, but what the market did not foresee is a boost of the populist movements and the weak performance of the moderate parties. It's unclear how exactly the 5-Star or the League, which together hold more than 50 percent, stand on issues relating to Europe or the banking union."
RAFFAELLA TENCONI, ECONOMIST, ADA ECONOMICS
"The market reaction won't be very positive: both the PD and (Silvio Berlusconi's) Forza Italia did worse than expected and worse than polls had predicted. With the League this strong, Matteo Salvini could ask to be appointed prime minister and this could put the centre-right coalition at risk.
"There are two options, in our view: a centre-right coalition or a coming together of the League and 5-Star. We don't believe there will be a repeat vote because - whether this is good or bad - in Italy eventually you always get to an agreement. It could take a couple of weeks, which is relatively short if compared with other European countries."
MATTEO RAMENGHI, CHIEF INVESTMENT OFFICER FOR ITALY, UBS WEALTH MANAGEMENT
"We expect lengthy negotiations after these elections, which may lead to increased volatility of Italian assets. A broad grand coalition would be well received by markets as it could result in political stability and fiscal discipline."
FABIO FOIS, ANALYST, BARCLAYS
"We expect the formation of a wide and heterogeneous coalition that could include anti-system parties. We do not expect such a coalition to deliver meaningful structural reforms, and depending on its composition, we see the risk that previous reforms could be unravelled." (Reporting by Milan newsroom; Editing by Toby Chopra and John Stonestreet)