"Sell first and ask questions later !" ...... this ain't just nerves, it's PANIC !

ref :- "Italy's deadlock sets the stage for a battle over the Eurozone" , Opinion by Tony Barber, The Financial Times.

The trouble with trying to point readers to a particular article or two is that on a morning like this things are moving so fast that they're out of date by the time you've finished reading ...... well, in terms of prices and levels anyway. If you'd been somewhere remote for the long weekend, like the Moon say, you'd be pretty flabbergasted by the market action this morning. Actually, even if you'd stayed a little closer to home and had kept a vague eye on things you'd still be pretty shocked at some of these moves. It's nothing short of a panic scenario out there and investors are dumping any asset with risk attached and piling into safe-havens.

It's all about Italy, of course ...... we banged on about Italy a lot last week, and if anyone thinks that they've heard enough on the subject they should prepare themselves for an awful lot more on the subject in the coming months, even if the panic levels subside a little bit. Well, all roads do lead to Rome, after all .....

Okay ..... things being what they are this morning we know that any attempt to offer some market levels is doomed to look pretty foolish within minutes (seconds even). But just for the sake of flavour , here goes anyway :

The FTSE MIB stock Index is at 21,360 .... off another 2.60% after yesterday's 2.10% sell-off . That's nothing .....

The meltdown in Italian bonds and the accompanying panic has drained liquidity at the short end to such a degree that 2yr Government Bond (BTPs) yield have hit 2.59%, up an incredible 160 basis points

Italian Government 10yr Bonds (BTPs) yield 3.13%, up 44 basis points from yesterday

The Germany / Italy 10yr yield spread has traded above 300 basis points this morning, a remarkable illustration of the market's view of the risk attached to Italian assets -- remember, it's only a fortnight ago that some were wondering whether the spread was already wide enough at 140 bp. On Friday we noted the fact that Italian 10yr yields had risen to premium of 100 bp over those of Spain. God knows that Spain has got some major political issues of her own (and this morning a spillover of a lack of liquidity from Italy into other peripheral markets), but that spread this morning ? ...... last at 133 bp.

The Euro (and by association Sterling to a degree) are sharply weaker, the US Dollar, Jap Yen and Swissie higher.

So exactly where are we with Italy ? After President Matarella rejected the appointment of the man the Five Star / League alliance wanted as finance minister , the eurosceptic Paolo Savona , the "premiership" of law professor Guiseppe Conti was over before it had begun. The President has asked the former IMF official Carlo Cottarelli to form a technocratic government. Mr Cottarelli's CV , which many might call distinguished, is one that could hardly have been better designed to get up the noses of populist politicians eager to follow an anti-establishment agenda. Moreover, the actions of President Matarella have been branded undemocratic and even treasonous by members of the populist alliance denied their chance to govern by the presidential block.

Support for the alliance, particularly for the League, has actually increased since March's election when Five Star took 33% and the League 17% (though the League can call on the support of other centre-right parties). So it is increasingly likely that they will force a snap election in October, maybe even September -- and if it was held right now, they'd probably win it convincingly. Support for centrist, establishment, liberal parties falls every time they're seen to be overriding the will of the people .... and for sure they will be accused of doing exactly that in this instance.

Now Italy has a long history of unstable, fast-changing governments ...... the reason why investors and EU officials are so worried about the current situation is that the election campaign may very well turn out to be fought on the issue of Italy's Eurozone membership. Italy being the third largest nation in the Eurozone, that would make it a vote on the very existence of the Eurozone and the Euro as we currently know them. Eurosceptics have long argued that Italy is not alone in being a nation that likes many of the comforts that the Euro has to offer but is not so keen on the discipline required for membership. In the past , it has been assumed that the security of being part of the Eurozone would always win out. With the rise of the populist front, that wouldn't necessarily be the case this time around.

A crucial element of the proposals to tighten the bonds between Eurozone nations, most enthusiastically put forward by President Macron of France in an attempt to strengthen the system against the threat of another financial crisis, is increased risk-sharing. Berlin has never been over-keen on that part of the strategy, and if Italy decides to pull the plug then the views of Germany and its northern allies will only harden. Brussels will also be distinctly worried about what a resounding populist win in another Italian election might do for the legitimacy of other such parties in other eurozone nations.

Would it be too alarmist to suggest that it's very possible that the Euro will face its greatest threat yet in the coming months ? Even if it proves that panicky markets are overreacting right now (as they often do), it's definitely on the cards and hardly surprising that investors are running for cover.

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