Nolan Stanton

Market Commentary

For the week ending 01 June 2018
Report by Nolan Stanton
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Nolan Stanton

This week was all about Italy, until a late bid for the headlines from the other side of the Atlantic. Bianco Research L.L.C. commented: ‘While the story of the Eurozone imploding is one which has played out fruitlessly many times before, there may be reasons to take this episode a bit more seriously. In the post-Brexit/Trump World, populist movements are not to be dismissed. These movements have the support of a much larger crowd than in the past.’ Thanks to President Sergio Mattarella’s veto of Paolo Savona as Finance Minister, the prospective government collapsed before it could even take office. So markets began to price assets for a crisis. The political risk is very complex so investors are reducing exposure. They are scared by the unpredictable political situation in Italy. Overnight the Italian populists reshuffled moving the Finance Minister to a less critical post and keeping the same Prime Minister, Giuseppe Conte, and other top players. That was apparently enough to satisfy the President, who preferred an elected government to a caretaker alternative.

The Italian 2 Year Government Bond Yield more than tripled on Wednesday rising to 2.77%. As recently as two weeks ago, it yielded -0.07%. This violent single increase exceeded any one day percentage move up in the 2 Year Government Bond Yield during the period 2010-12 when it seemed the Euro would breakup and Italy may default. The recent electoral success of populist parties makes it apparent that a material section of Italy’s voters, in the Eurozone’s third largest economy, wants major political change.

With less than two decades under the Euro’s belt, will the common currency survive? The cracks in the banking system are beginning to grow more visible, with Deutsche Bank being one of the biggest fallers, off more than 40% year-to-date. Italy’s populist Government has come under the microscope of the credit agencies. Moody’s announced last week that it was placing the country’s debt on review for downgrade. The moves this week have been eye opening. Perhaps we should consider just how miraculous it was that Italian bond yields were so low. Some expect the European Central Bank (ECB) to play the White Knight and save Italy. They should consider the remarks of retiring Vice President Constâncio in an interview in the midst of the rout when he was asked:

‘So if Italy wants to circumvent the EU’s fiscal rules, it can’t necessarily count on the ECB’s help?’ He replied: ‘I will only say that Italy knows the rules. They should perhaps take another close look at them.’ History may not repeat exactly, but it does tend to rhyme…

As if a potentially game changing European crisis was just too much for the White House publicity machine to bear, President Trump stole the limelight at the end of the week. He announced import tariffs which could trigger a global trade war. His new best friend, President Macron of France told him they were illegal. As fearful markets sold off, the most affected countries stated their intentions to retaliate. But, that is next week’s story…