Listen, it’s a good news type of day, ok?!
(Note: I’m feeling especially sarcastic today and that’s likely to come through in every post, so strap in)
Italy – which, I was told by one criminally insane reader who e-mailed me late last month claiming that Di Maio and Salvini, being the strong-willed populist champions that they are, would never “fold” to the nefarious eurocrats in Brussels – has apparently folded to Brussels.
According to an unidentified “Treasury official”, Rome is now proposing a 2% deficit target for 2019, which marks a rather stunning relent considering Tria was figuratively crucified by Di Maio and Salvini back in September when he insisted that 1.9% would be the number Italy should float if they were interested in retaining bond market access and/or avoiding a bank crisis. The new proposal will be presented to Juncker in Brussels on Wednesday evening – or something like that.
As you can probably imagine, markets love it. In fact, 10Y yields for Italy are below 3% for the first time in months. Here’s the intraday move:
And here’s the spike in Italian financials, which have been beaten like the red-headed step children that they most assuredly are in 2018 because after all, if BTPs collapse too much, the dreaded sovereign-bank loop will be back in play at which point it’s adios muchachos (that’s an Italian term).
This is an apparent effort to avoid financial penalties attached to Italy’s recalcitrance on the budget and it also comes (not coincidentally) ahead of the ECB calling an end to APP. As a reminder, the ECB was (for all intents and purposes) the only bid for Italian bonds. In other words: Italy was either going to back down or else they were going to have to fend for themselves in a market where price discovery suddenly makes a comeback.
Of course there is no guarantee that this is going to work, but the new budget proposal (if it is indeed 2%) is a marked step back for a government that has become famous for obstinance.
Speaking of obstinance, Salvini is reportedly plotting to effectively seize power. “With both Salvini and fellow Deputy Prime Minister Luigi Di Maio of the Five Star Movement refusing to agree to a 2019 deficit below 2.1%, Conte’s mission to Brussels is seen within the government as a ‘certain defeat,'”, Bloomberg writes, summarizing a Repubblica report which also says an EDP procedure is likely to ensue. “The resulting crisis could play right into Salvini’s hands”, Bloomberg continues, adding that “although his League is technically the junior member of the governing coalition, polls show it overtaking Five Star as Italy’s most popular party.”
Nobody – I repeat, nobody – could have seen this coming…
Salvini talking about Five Star: "The drama has been going on too long and is wasting everyone’s time."
I see a future where he tries to consolidate power. Either that, or the rest of the government tries to get rid of him. Will be hard. League's support > 5 Star in polls.
— Walter White (@heisenbergrpt) October 20, 2018
Now then. If you wanted to be optimistic here, you could conceivably argue that if Salvini can dispatch with “Liddle’ Luigi” (as Trump would call Di Maio if Trump were Salvini, which he basically is), it would make it easier for the government to craft a consistent plan, especially if said government were free from the expensive constraints of Five Star’s electoral promises.
So, you could say that rumors of new elections are actually bullish for BTPs. But if that’s you (i.e., if you’re going to make that argument), don’t forget that in that scenario we would be talking about Salvini consolidating power. Go back and watch a few video clips of Salvini talking about, well, talking about anything really, but especially immigrants, and tell me if you think that’s a good idea.
Skipping right along to other “good” news across the pond, Germany looks like they’re all set to put an end to the Deutsche Bank drama once and for all by confirming long- running rumors and rolling that sucker up with Commerzbank. That’s according to Bloomberg (again) and it gave shares of both a lift.
All of the above is fantastic news for European financials, which are locked in a dead heat with the SXAP to see which sector on the Stoxx 600 can plunge the most for 2018. Here’s the banks index on the day:
And here’s a panned out version which shows you how egregious the 2018 plunge from the highs has been:
You can draw your own conclusions as to what all of the above means going forward, but whatever you want to call it, don’t call it “clarity” or otherwise suggest that there’s less uncertainty today than there was yesterday.
Because as I hope came through over the course of this 745-word rant, this is still a hot mess.