Market update: Traders ponder Italy’s prospects, and sell

29 May

by Mihály Tatár

 

Good Morning!

 

  • Monday’s bounce in sentiment was even shorter than expected, as with the US on holiday, traders focused on Italy’s long term prospects (DAX -0.58%, Italian stocks -2% and -11% for May, Unicredit -19%,  Italian 2Y yield 1% – used to trade at -0.30% before the elections, 10Y yield 2.68%, with the money fleeing into German bunds – 10Y 0.34% and US Treasuries – 10Y 2.90%, and the EURUSD dropping to as low as 1.16 – we started April at 1.24). The latest news is that the Five Star and the League are mobilizing and plan large demonstrations – needless to say, the Italian President’s decision to ask an ex-IMF and pro-German policies official to form an interim government had terrible optics – as if he wanted to demonstrate that Italy was indeed a colony. It’s no wonder that the Leage and the Five Star increased their popularity since the elections (together they poll 55%), and League-chief Salvini threatened that ’either EU rules change or it makes no sense for Italy to remain in the EU’.) Unlike investors, Germany still doesn’t seem to grasp the severity of the problem – Merkel gave a speech in which she criticized bankers ’who walked off with money during the financial crisis and are responsible for populism’ – this is quite rich from someone who categorically ruled out giving any financial aid to Greece originally – we all know how this ended –   and was busy saving the largest German banks from taxpayer money during the entire crisis. The reality is, in my view, that the Italian structural crisis was never sold in the first place – only the ECB’s easy money made it look irrelevant – , and the pro-Brussels side which called for patience simply lost all its arguments with growth being still low (1.4% Y/Y) and unemployment still very high (11%), at a time when the US and Germany are already talking about ’a cooling from their boom years’.  Otherwise, the profit-taking continued in oil (WTI 66.80, Brent 75.60 USD, BP -2%, Total -0.7%, Shell -0.3%), but even so Brazilian stocks crashed by 4.5% (13% in May) with the trucker strike still not over and by now even Petrobras – the Brazilian oil and gas giant – workers planning to go on strike. (The latter’s stock price dropped a whopping 38% in two weeks.)

 

  • As discussed earlier, the notion of the ’Cold War 2.0’ between the West and Russia became unsustainable by 2018, and this week was full of signs that changes are underway: In a 10-day period, three leaders, Merkel, Macron, and Abe met Putin, all chanting that Russia is an indispensable partner. (This is somewhat of a turn after calling Russia the greatest threat to Europe and calling its leaders gangsters after the spy poison case – I guess after the Iran clash with the US, for the EU, any international ally is badly needed.)  In Washington, the anti-Russian wing of both of the Democrats and the Republicans have weakened, and these days there is daily coordination on Syria between the US, Russia and Israel. (From the looks of it, for Putin it is a good trade to push aside its ally Iran in return of a better relationship with Trump.) Of course, not everyone is happy, and Poland is asking for a permanent US base to deter Russia – they are even willing to pay for it in the tune of 2 billion Euros. (Hey, why not asking the EU army for help? Just kidding.)

 

Have a nice day,

Mihály

 

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