Unsurprisingly, Italian assets came under pressure Wednesday following a series of ill-advised comments from Matteo Salvini, the country’s most powerful politician.
“If we need to break some limits, we’re ready to go ahead”, Salvini said Tuesday, adding that “until we arrive at 5% unemployment, we will spend everything that we should, and if someone in Brussels complains, that won’t be our concern.”
He was referring to EU rules around deficits and debt-to-GDP ratios. BTPs slid on the news.
Salvini reiterated the point in bombastic terms later, telling Porta a Porta RAI that it’s “my duty to breach EU limits if they starve Italian families.” Obviously, nobody is trying to “starve Italian families.”
Fast forward to Wednesday and Italian bonds are under more pressure, especially the short end, where yields rose sharply following a small block trade. Carry traders, Bloomberg notes, are “liquidating positions ahead of summer”. The BTP-Bund spread is creeping back up near 290.
“[This is] going to be the story in European markets in the coming weeks”, Mizuho rates strategist Antoine Bouvet remarked, adding that it’s “realistic” for the spread to balloon out to 300bps given trade frictions weighing on risk appetite and market participants being “reluctant to hold spread risk into the European elections”.
If you ask Commerzbank, benchmark Italian debt could trade as wide as 320bp to bunds. 10-year German yields fell to -12bp on Wednesday amid safe haven flows. That’s the lowest since October 2016.
German GDP surprised to the upside in Q1, as data out Wednesday showed Europe’s largest economy expanding 0.4% QoQ. That’s a relief to those who fretted that a worsening manufacturing slump was poised to plunge the country into a recession.
Italian banks are having an awful go of it. UniCredit, UBI Banca and Intesa Sanpaolo paced declines in Italian equities.
As noted on Tuesday, Italian stocks’ outperformance relative to their European counterparts has faded lately.
While the FTSE MIB is still up nicely YTD, it’s down sharply for the month as Italian assets begin to trade like the macro risk-off whipping boy they most assuredly are. Salvini’s budget comments are just insult to injury. “Stay out of Italy”, one Danske analyst told Bloomberg, in an email.
Asked Wednesday whether he’ll ultimately force a break with Five Star (which is just a polite way of asking whether he’s going to resort to a power grab), Salvini told Corriere della Sera the following:
We have too much to do. And an alternative majority doesn’t exist.
As far as EU budget constraints are concerned, Salvini called the bloc’s fiscal rules “outdated, old and imposed without any sense.”