You’d be forgiven for being skeptical of any and all rallies in Italian assets given who’s running the show in Rome, but I suppose it’s worth noting that today was the best day since June for both the FTSE MIB and for Italian financials.
The euphoria is tied to the possibility that both Five Star and League (so, Di Maio and Salvini, respectively) are now open to compromise on the budget.
Apparently, the government in Italy is not completely opposed to cutting the deficit target to 2.2% or 2.3%. For his part, Salvini says he’s going to “use common sense” and won’t “get stuck over 0.1% more or less.”
That’s “more or less” not what Salvini has being saying since September, when he and Di Maio effectively overruled their beleaguered Finance Minister on the way to announcing a 2.4% target which is what ultimately caused the E.U. to reject the plan.
“The issue is not the conflict with the EU on a deficit of 2.4%, what’s important is that not even a single person is kept out of the core measures”, Di Maio remarked, in a radio interview.
As noted above, the hints at flexibility from Italy’s populist champions were enough to spark a furious rally. Here’s the MIB (top pane) and Italian financials (bottom pane):
10Y yields in Italy dove nearly 14bps, to their lowest in two months. This is the fourth session in a row that yields have fallen.
“Lo spread” of course snapped tighter thanks to the ostensibly good budget news combined with Monday’s generalized risk-on mood.
Needless to say, you shouldn’t get too excited about this. The idea that 2.2% on the deficit versus 2.4% is going to change Brussels’ mind about the fiscal trajectory in Italy is laughable.
Further, any changes to the fiscal plan that would satisfy the E.U. are a non-starter for the populists, whose popularity appears to wax and wane depending on how adversarial they act towards Brussels.
Eventually, this will dead end in a financial crisis for Italy unless the ECB steps in to offer a lifeline after APP winds down in December.