Meloni and Merz: 'Let Europe take the lead and choose its own destiny'

Italy and Germany signed an updated German‑Italian Action Plan and seven bilateral understandings in Rome, including a non‑binding political declaration on security, defence and cybersecurity and a refreshed 2023 strategic cooperation roadmap. The accord emphasizes EU strategic autonomy, strengthened NATO deterrence, coordinated sanctions and support related to Ukraine and Gaza, joint initiatives to deepen African economic ties (building on Italy’s Mattei Plan), and targeted industrial measures to protect automotive competitiveness while pursuing a competitive green transition with technological neutrality.

Analysis

Market structure: The German–Italian Action Plan tilts demand toward European defence contractors, legacy automotive suppliers and energy/infrastructure firms rather than pure-play China-exposed EV makers. Expect a 12–36 month procurement and subsidy tailwind: defence budgets could lift select mid-caps by +20–40% and industrial suppliers by +15–30% if EU coordination leads to procurement harmonization and protected regional content. Commodity demand signals are mixed — metals for both ICE and electrification remain supported, but “technological neutrality” moderates an immediate capex surge into EV-specific supply chains.

Risk assessment: Tail risks include geopolitical escalation (new Russia sanctions or broader NATO commitments) and domestic political reversals in Rome/Berlin; either could widen BTP-Bund spreads by >50bps in weeks. Short-term (days–weeks) market reaction will be muted; measurable credit/FX flows and corporate procurement wins manifest over 3–18 months. Hidden dependencies: success depends on EU-level funding and Germany’s industrial policy implementation; failure to deliver funding or trade frictions with China are key reversal catalysts.

Trade implications: Implement concentrated long exposure to European defence (RHM.DE, LDO.MI) and selective industrial suppliers (CON.DE, STLA) with 12–24 month horizons, financed by light hedges in high-valuation EV names. Credit/FX trades: buy Italy beta via UCG.MI or BTPs on a 6–12 month view for 20–40bps spread compression; tactically long EURUSD if capital flows favor Euro assets. Use option structures (12-month call spreads) to express upside while capping premium paid.

Contrarian angles: Consensus underestimates implementation frictions and the likely multi-year nature of any reshoring: procurement cycles favor incumbent suppliers, not new entrants; this benefits established European mid-caps over flashy EV growth names. The market may be underpricing Italy-specific credit improvement; if BTP-Bund tightens >30bps, Italian banks and industrials should re-rate quickly. Conversely, if EU fails to fund initiatives, overstretched long positions in defence and mids could retrace 20–30%.

Key Decisions for Investors

• Establish a 2–3% portfolio long split: 60% Rheinmetall (RHM.DE) and 40% Leonardo (LDO.MI), horizon 12–24 months; target +25–40% upside if EU/Germany increases defence procurement, set a 12% stop-loss and take profits at +30%.
• Add a 1.5–2% long position in Stellantis (STLA) to capture industrial policy support for European automotive supply chains over 12 months; hedge tail valuation risk by shorting 0.5–1% Tesla (TSLA) as a relative-value hedge, exit if STLA underperforms TSLA by >15% over 3 months.
• Build 2–3% exposure to Italian cyclical reopening via UniCredit (UCG.MI) (or direct 7–10y BTPs) to play 20–40bps BTP-Bund spread compression within 6–12 months; target +25–35% equity upside or 20–40bps spread tightening, stop-loss -12% (equity) or widen by +60bps (bonds).
• Use options to limit downside: buy 12-month call spreads on Continental (CON.DE) or COPX (copper ETF) sized 0.5–1% notional to express industrial/commodity upside; simultaneously buy a 3–6 month EURUSD call spread (1% notional) to capture potential EUR appreciation if capital flows into Eurozone assets.