Heading into the weekend, the Italian government massively stepped up security across the country in anticipation of demonstrations by anti-fascist and far-right groups, ahead of the general election on March 04. Italians will go to the polls next Sunday, in an election that could rebalance the political environment or send shockwaves through the European Union.

According to CNBC, here are the three leading candidates dominating the race:

Silvio Berlusconi, former prime minister and head of Forza Italia.

Matteo Renzi, the embattled leader of the center-left Democratic Party (PD) and former prime minister who quit the post in 2016 after a referendum on constitutional reform failed.

Luigi Di Maio, the anti-establishment 5 Star Movement’s (M5S) leader.

Last night in Pisa, Italy, anti-fascist protestors formed a counter-demonstration against Lega leader Matteo Salvini, who was speaking at the center of town. Anti-fascist groups threw glass bottles and rocks and attacked police officers as they tried to silence Salvini, a leading anti-EU political figure, before next week’s elections.

Italy, #Pisa #antifa protest against the visit of Lega far-right leader Salvini LIVE STREAM https://t.co/Wzad5gmsVg — Professor Cuz (@ProfessorCuz) February 23, 2018

Insane video of Anti-fascist activists fighting with police last night in Pisa

Soros puppets meet Italian police.. pic.twitter.com/6k0uiiLCw6 — Voice of Europe (@V_of_Europe) February 23, 2018

In the early hours of Saturday morning, riots have erupted on the streets as police and protesters have clashed in Pisa and Milan with massive marches expected in Rome later in the day, said the Daily Express.

Rome : la manifestation anti-fasciste arrive sur la place du peuple #Italie pic.twitter.com/BWPTWb0p5r — François Beaudonnet (@beaudonnet) February 24, 2018

Former Italian prime minister Matteo Renzi is expected to visit an anti-fascist protest hosted by the Democratic Party in Rome. Preliminary reports indicate more than 20,000 people are expected to protest in just one march by the National Association of Italian Partisans (ANPI) and ’Mai piu fascismo’ (Fascism Never Again). There will also be three other protests planned in the Italian capital later in the day.

Police commissioner Guido Marino told the Daily Express: “We have two objectives – guarantee a high standard of counter-terrorism prevention and prevent violent groups from infiltrating the marches with negative consequences for order and security.”

Protestors from the National Association of Italian Partisans (ANPI) are currently underway in Rome…

Demonstrators from ’Mai piu fascismo’ (Fascism Never Again) are lining up for a rally in the heart of Rome.

Rome anti fascist march pic.twitter.com/z9F5vDx3T7 — mike cooper (@cooparia) February 24, 2018

“At the call of the left, thousands of people parade against fascism in Rome, in the rain but in good humour #AFP,” said one Twitter blogger.

A l'appel de la gauche, des milliers de personnes défilent contre le fascisme à Rome, sous la pluie mais dans la bonne humeur #AFP pic.twitter.com/XaHQPDa2sJ — Fanny Carrier (@fannycarrier) February 24, 2018

“MFJ in #Rome on #siCobas March for immigrant & workers rights-against #razzismo& #Fascismo #24febbraio Open the borders of Italy and Europe! Organize community proletarian defense against the fascists led by workers/gold immigrants, young and young! Solidarity!,” one activist said.

MFJ in #Rome on #siCobas march for immigrant & Workers rights – against #razzismo & #Fascismo #24febbraio

Aprire le frontiere d'Italia e d' Europa! Organizzare difesa proletaria comunitaria contro i fascisti guidata da lavoratrici/ori immigrati, giovani e giovani! SOLIDARITY! pic.twitter.com/LvG7kxzQeb — Movement for Justice (@followMFJ) February 24, 2018

“Anti-fascist protests have kicked off outside Termini station in Rome!,” alerted one twitter user.

Anti-fascist protests have kicked off outside Termini station in Rome! pic.twitter.com/cwyV6YKdKD — Kat Sanders (@AnatomyKat) February 24, 2018

The Daily Express provides the economic and social backdrop in why Italy’s political environment is in chaos:

The bleak economic forecast and growing immigration concerns have resulted in toxic election campaigns for the upcoming vote amid fears of a revival of neo-fascist sentiment. Tensions have risen across Italy ahead of the elections as right-wing Lega Nord Matteo Salvini has pledged large scale deportation of refugees. He vowed to deport 500,000 migrants within five years if his party wins the election – including 100,000 in the first year. Polls suggest the conservative coalition made up of former prime minister Silvio Berlusconi’s Forza Italia (Go Italy!) and its far-right allies will win the most parliamentary seats, but probably will fall short of an outright majority. In that case, President Sergio Mattarella could ask a centre-right figure to try to form a government, or he could turn to Luigi Di Maio, leader of the anti-establishment 5-Star Movement, which looks set to become Italy’s largest party. Before a poll blackout came into force on Saturday, 5-Star was polling at around 28 percent, ahead of the ruling PD on 23 percent and Forza Italia on 16 percent.

Maxime Sbaihi, a Euro-Area economist for Bloomberg said (Feb 19), “Italy’s general election, aka the euro-area’s top political event of 2018. Our composite poll tracker shows @Mov5Stelle and @pdnetwork, the 2 poll leaders, drifting further apart.”

Italy’s 5-Star Movement (nationalism/populism) versus Democratic Party (status quo) explained in one chart:

And perhaps it is this chart more than others that has the market getting nervous.

As Tom Luongo details, we are in the quiet period before the Italian elections. No public opinion polls are published in the last two weeks of an election cycle per Italian law. Consequently, there is a bit of a news lockout on the subject.

These are the most important elections in Europe this year – laying aside the possibility of a German re-vote – and the amount of coverage it is getting is disturbingly scant. Articles like this bit of pablum from Bloomberg is what passes for analysis, purporting to tell you “What You Need to Know about Italy’s March 4th Elections”

Even as the specter of populist revolt recedes elsewhere in Europe, Italy’s anti-establishment, Euroskeptic Five Star Movement is seeking a breakthrough.

That’s a lie. And a bald-faced one at that. There hasn’t been one election in Europe in the past two years where populism hasn’t been a major and rising factor. The fact that Italy’s President dissolved parliament early and moved elections up from May to March 4th is proof they are scared of the trend.

Because the trend is against them. Five Star Movement or M5S continues to rise in the polls and another two months would put them in a position to put a government together.

The writers of this article push a lie that M5S is uninterested in forming a coalition government. The rules for this election were changed to allow the parties to fight as coalitions to freeze out M5S from ruling, even if they win the most votes.

The last polls taken had the Northern League tied at 15% with Silvio Berlusconi’s Forza Italia. These two are campaigning together. And the intention, clearly expressed by the Bloomberg writers, is to create a ‘grand coalition’ a la Germany, which no one in Italy wants except the political elites who back further integration with the European Union.

Bond Posturing

These are the real stakes in the Italian elections next week. And despite the gaslighting of the Bloombergs and worse, the Los Angeles Times, trying to tell everyone that M5S has no chance at winning, traders in the sovereign bond pits aren’t buying it.

Since the beginning of December European bond yields across the board have been rising. The chart below is the magnitude of the rise in yields for Germany, France, Portugal and Italy.

Note how for most of February yields have been rangebound, treading water. This is most likely the European Central Bank in there buying up supply to keep yields from rising despite the steady march higher of yields in the U.S.

Italy’s debt, however, is in free fall. In the past five trading days Italian 10-year debt has risen a whopping 20 basis points. Rising yields equals lower bond prices and the bond vigilantes are calling the bluff of the media and the ECB by selling Italian debt with impunity. They are rightly scared that the polling numbers are far worse than what we’ve seen at this point.

Italy’s 10-year debt is now trading well above recent high at 2.10% (see chart below). More importantly this week’s price action broke a long-running trend of lower highs and lower lows in yields, indicative of a bullish market.

Now, it’s hard for that market to not be bullish when the ECB is the only marginal buyer of Italian debt and heretofore, traders bet on that behavior continuing in perpetuity, front-running the ECB’s buying.

But, rising yields means that the net volume of selling across the spectrum of European sovereign debt is more than the ECB is willing or allowed to buy. So, what’s happening is the ECB is managing the rate of the rise in sovereign bond yields and that is clear in the chart above.

What is also clear is that it is losing control of the Italian bond markets.

Coalition Party Bingo

So, what’s next? While new polls will not be published between now and the election, polls are being taken. Someone has seen them. And, by inference, the Italian bond market is telling us that those numbers are either far worse than we’ve been led to believe at this point or some traders are simply nervous.

I believe it’s the former, otherwise yields wouldn’t have pushed through 2.1% to the upside. If the Northern League and M5S can pull off something close to a clear majority together that would be a big blow to Brussels’ plans to control coalition talks.

Moreover, if this last bit of news about M5S candidates standing for specific seats gaining ground is accurate then the renegade party will have a much stronger hand to play as it will pick up more seats than poll watchers were anticipating.

The natural alliance here is the Northern League and M5S. Berlusconi, I feel, has been acting as a stalking horse for the established political powers to freeze M5S out of coalition talks and hand a weak “cartel” government to Brussels for upcoming debt relief and banking reform talks.

NL leader Matteo Salvini has wrapped himself fully in the populist flag, echoing Donald Trump. One of the few things the Bloomberg article linked above gets right is all of the parties backing off from a referendum on the euro.

For now that is off the table to get votes but Salvini and his M5S counterpart Luigi Di Maio both know that Italy’s path to prosperity lies through either a massive write-down of its sovereign debt, something German voters are clearly not in favor of (and are becoming moreso every day) or leaving the euro and depreciating it away.

Given the rate at which rates are rising that is moving that timetable up considerably. And with no government in Germany yet that creates a lot of uncertainty for investors, who rightly, are beginning to panic that those in charge really aren’t.

A firming dollar and U.S. equity markets would also imply that we’re seeing capital begin a panic move out of Europe in case the populists win.

In any case, the markets will tell us what’s really happening even if the politicians and the media won’t.