Italy – Uncertainty
Markets are regaining composure this morning on practically all levels after yesterday the Italian 2-year bond yields had risen in a rather dramatic way (panic), and other markets moved in the same way and direction. 10-year U.S. Treasury yields also did fall, although by any reckoning, yesterday’s 10-year U.S. treasury yield should be considered as relatively less attractive as a safe haven than it was a couple of days ago.
U.S. equity markets and bonds, as well as in most other markets, give solid indications that yesterday’s turmoil can be viewed as a bump in the road. Nevertheless, yesterday’s events caused by Italy’s election crisis remind us that all markets can turn on a dime and getting too complacent is never a good attitude.
This morning, Italy successfully sold 5- and 10-year debt at an auction, helping reassure jittery markets following yesterday’s meltdown in Italian bonds amid the ongoing political crisis. Both auctions were oversubscribed by investors. The country’s securities held earlier gains following Tuesday’s rout that saw 66 billion euros ($77 billion) wiped off the country’s debt market. The debt office sold 1.82 billion euros worth of 10-year bonds, with a bid-to-cover ratio of 1.48, and 1.75 billion euros of five-year bonds with a bid-to-cover of 1.53.
One could say, so far, so good.
For investors it might be helpful to recall that monetary unions are killed off by bank runs, with people moving their cash out of the country or simply holding physical cash instead of letting it in their bank accounts. Let’s be clear, at the moment there is no evidence at all of something like that happening in Italy. Also, bond markets do not signal if a country is going to leave a monetary union. Probably more important, of all the Italian political parties that includes the two populist “anti” political parties that won the elections, which by the way are not natural allies, no single Italian political party as well as the Italian population as a whole wants a euro exit.
For now, I think it might be wise to let the Italian political circus for what it is, keeping in mind that the next political crisis in Italy could always be just around the corner whereby the election arithmetics always can be changed abruptly.
The political crisis drove yesterday Italy’s credit risk, which is not junk-rated (yet) higher than that of any emerging market including Turkey, which is itself in the midst of a crisis.
The cost of insuring Italy’s debt against default for five years using credit-default swaps soared as high as 276 basis points, overtaking Turkey, Brazil and South Africa, which are all junk-rated countries.
U.S.-China trade dispute
The White House said in a statement yesterday that a final list of imported goods from China to be targeted will be released by June 15, and levies imposed “shortly thereafter.”
The wall Street Journal reports today that the White House’s surprise decision to move forward with tariffs and other sanctions against China threatens to derail trade talks scheduled for this weekend, according to people with knowledge of the matter on both sides. A U.S. advance team was scheduled to arrive in Beijing today, ahead of Commerce Secretary Wilbur Ross’s planned arrival on Saturday, but if the two sides fail to reach accord about issues to be discussed, Mr. Ross’s trip could be canceled. Should those discussions go well, however, the high-level talks would proceed as planned.
A strongly worded article from China’s official Xinhua News Agency said early today that the Trump administration’s “flip-flopping” is hurting U.S. “national credibility.”
Meanwhile, U.S. economic growth slowed slightly more than initially thought in the first quarter amid downward revisions to inventory investment and consumer spending, but income tax cuts are likely to boost activity this year, Reuters reported.
Gross domestic product increased at a 2.2 percent annual rate, the Commerce Department said in its second estimate of first-quarter GDP on Wednesday, instead of the previously reported 2.3 percent pace. The economy grew at a 2.9 percent rate in the fourth quarter.
In the meantime, the U.S. economy continuous doing OK and notwithstanding yesterday’s panic/sell off (still small) in the financial markets caused by the political crisis in Italy, there is certainly no reason whatsoever for the Fed to take that into account.
Etienne “Hans” Parisis is a bank economist who has advised investors on financial markets and international investments.
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