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euro europe Giuseppe Conte italy Luigi Di Maio Markets Matteo Salvini

That’s Amore.

Who wants to catch a falling knife?

Well, Monday looks like another episode of “will they or won’t they?” when it comes to Italy and the closely-watched budget.

A deluge of conciliatory comments out of Italian Finance Minister Giovanni Tria over the weekend are supporting Italian assets across the board to start the week, as Italian stocks surge more than 2%.

Speaking on the sidelines of the Ambrosetti Forum on Sunday, Tria insisted that Italy understands the necessity of slashing its debt burden and ensuring the fiscal situation doesn’t deteriorate. This is part of an ongoing communications effort designed to massage the message this month amid market fears that the populist government’s ambitious reform plans will end up causing the country to run afoul of E.U. budget rules at a time when Deputy PM Matteo Salvini is engaged in a bitter war of words with Brussels over immigration.

The government, Tria promised, is cognizant of the market’s concerns.

The beleaguered FTSE Italia All-Share Banks Sector Index (which was down more than 30% from this years highs at one point after falling off a cliff during the May turmoil) jumped more than 4% on Monday:

FTSEItalia

10Y year yields for Italy fell 9bps to start the week.

Italy10

(Bloomberg)

And the BTP-bund spread has come in materially from the local wides.

BTPBund

(Bloomberg)

This is all welcome news and comes days ahead of the ECB meeting where Mario Draghi will doubtlessly be asked about the situation in Italy. Generally speaking, the prospect of ballooning the deficit at a time when yields are rising is a terrible idea (although Donald Trump apparently doesn’t think so), which explains why the market is so concerned about the budget and, more to the point, about the conflicting messages from Tria and Salvini.

For their part, JPMorgan notes that it looks like BTP shorts are being unwound. Earlier this month, the bank suggested that based on their proxy for speculative positioning, folks were getting pretty unnerved about the prospect of a budget battle with Brussels. In a note dated Friday, they’ve updated that analysis to take account of a sharp rally in BTPs over the past week.

BTPDec

(Bloomberg)

“Open interest declined sharply as market participants appeared to have used the futures roll as an opportunity to take profit on bearish positions rather than rolling them on to Dec18 contracts [and] this has seen a sharp reduction in bearish BTP exposure that unwound the shorts that built up during August, but not the build-up of shorts that took place during June”, the bank’s Nikolaos Panigirtzoglou writes, adding that although “speculative investors likely remain net short, given the markedly less confrontational tone in official statements and media reports pointing to tighter fiscal deficit targets than feared by investors in recent weeks, an unwind of remaining short exposure could provide some further support to Italian government bonds.”

BTP

(JPMorgan)

 

Meanwhile, Morgan Stanley thinks it might be time to “bargain” hunt in Italian stocks, which the bank says are “unduly cheap relative to BTP spreads”.

So, who wants to catch a falling knife and bet that the populists won’t blow up the budget?

Read more

Lords Of The Spread

Bad Italian.

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