Italy Part 2 ...... or, when doubt is a good thing .....


ref :- Various

We hope that it comes as no surprise that things can move pretty quickly in markets. They moved pretty quickly yesterday .... we'd only just got round to examining what a populist coalition is doing to Italy's markets when further moves meant that our observations seemed a little ..... well, out of date.

Remember how we were pointing out that yields on 10yr Italian Government debt (BTPs) had jumped from 1.73% on May 3rd to 2.27% ? They actually hit 2.42% later in the day ..... that's a rise of 64 basis points in two weeks. That crucial Germany / Italy 10yr yield spread, which we noted had moved from 1.26% out to 1.70% over the same time period, traded at 1.89%. It would be fair to say the the markets do not like what they read about the coalition's plans in government, particularly on the fiscal front.

Unaccountably, we omitted to draw attention yesterday to another of their proposals that is getting EU officials bent out of shape in particular .... Mini - BOTs.

BOT is shorthand for short-dated Italian Treasury Bills, and the term has been adapted to describe non-interest bearing Government IOUs that the coalition intends to issue to the government's small-sized creditors .... suppliers and the like. The accusation is that to do so might constitute issuing a "parallel" currency -- which of course would be illegal in the Eurozone. The coalition counters that since the Mini-BOTs are not legal tender, they would not be breaking the rules. Others might be of the opinion that since one would be able to use the Mini-BOTS in exchange for state-run services, like train tickets for example, if it's not a parallel currency it looks very much like one. Mmm .... we'll have to wait to see how this one pans out but the issue doesn't inspire confidence in the new administration any more than their peculiar fiscal arithmatic does.

Law professor Giuseppe Conte, a man with no political experience, was indeed the man put forward to become Italy's next Prime Minister, though President Sergio Matarella has yet to ratify his appointment and may take a few days to do so -- assuming he eventually does approve of the nomination, which is not certain. Mr Matarella has a couple of very difficult decisions to make : 1. Does he accept the coalition's highly controversial agenda that not only ignores conventional economic and fiscal wisdom, but is also BOUND to bring Italy into conflict with EU lawmakers ? 2. Does he approve a novice Prime Minister who will have to keep a lid on the very sizeable differences between the combative leaders of the Five Star and League parties, Mr Di Maio and Mr Salvini ? The President might also be wondering how the lawyer will fare when representing Italy's case against angry European officials. How much autonomy will he command ? If he's getting a metaphorical shoeing from the likes of Merkel and Macron, will he have to phone home every time a decision is required ?

You could certainly be forgiven for thinking that there might be a lot more trouble in store for Italy and its assets. You might even have assumed that they must be tumbling again today. Ah .... but that would be too simple. Stocks are actually marginally higher as we write, and at 2.34 10yr bond yields are 5 basis points lower than yesterday's closing print. Now in these circumstances, why would share prices be marked higher and bond yields lower (which of course means bond PRICES higher) ?

Part of it is just a bout of profit-taking after pretty relentless one-way traffic in recent days and weeks. But another explanation doing the rounds is that even if the coalition's agenda is accepted along with the new Prime Minister, the policies are so off-the- wall that none of them will be there long.

That'll be a sobering welcome for Mr Conte : "The markets are up because nobody thinks you can last long .....". We're not aware that Mr Conte has revealed how much attention he generally pays to markets. If it's not too much, he'd do well to get on top of it quickly. He might be aware how much politics influences markets, but it's very possible he'll find out the hard way how much that works in reverse too .... and that might be a very painful experience indeed.

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