In case it’s not clear enough, trying to trade every headline on Italy is an exercise in futility, but that doesn’t mean folks aren’t going to try and do it anyway.
On Friday, the market appeared to key on what were variously described as conciliatory remarks from Moscovici, who, in comments at an event in Rome, said the E.U. hasn’t made any decisions on the Italian budget yet. He also insisted that Brussels isn’t motivated by political concerns and said he’s aware that the Italian government has domestic economic priorities that need to be addressed.
Those comments came on the heels of a barrage of negative headlines that dented sentiment materially on Thursday.
Moscovici went on to say he expects Italy to respond by lunchtime Monday to the letter that contributed to Thursday’s sour mood.
Meanwhile, Salvini and Di Maio are all over the damn place. Apparently, the two are at odds over a tax amnesty proposal and Salvini was forced to cut short what I’m sure was a characteristically absurd speaking tour in northern Italy to fly back to Rome in the interest of hammering things out with Five Star.
“I told to my Five Star friends that it’s not the case to fight within a family”, he said, adding that “problems are solved by talking, not by making them public”. That sounds like something out of a Sopranos episode.
So you can add internal strife to the list of problems Giuseppe Conte has on his hands.
Meanwhile, Italian financials fell for a fourth consecutive week.
On the whole, European banks fell to a new two-year low on Friday.
The headline today was that Italy “contagion” is starting to show up across European bond markets. Spanish yields surged and at the highs were some 140bps wide to bunds. Here’s the big picture:
This pretty much sums it up:
— Paul Dobson (@paul_dobson) October 19, 2018
All of this is of course set against the backdrop of the ECB’s plan to end PSPP and CSPP at the end of the year (reinvestment flows notwithstanding). With the marginal, price-insensitive bid gone, it will be left to private investors to absorb supply and that means (gasp!) price discovery, or some semblance thereof.
“The key over the coming weeks and months will be for Italy to attract new marginal buyers of its debt”, BofAML writes, in a note dated Friday, before noting that “the government’s spending commitments, plus the end of QE next year, will mean that a net €55bn of Italian sovereign supply will need to be absorbed in ‘19.”
Assuming Italian banks aren’t going to be keen on making themselves even more vulnerable to a return of the dreaded sovereign-bank doom loop, it means domestic investors are going to need to come to the table. That means higher yields – period.
The “bad” news (for markets anyway) is that Italian voters are still relatively sour on the E.U. The good news is that the 12-month rolling correlation of spread changes for Italian and Spanish bonds has fallen dramatically, which should mean less contagion.
Draw your own conclusions.