Market update: Italy leads assets lower, German politicians strengthen the League, EURHUF above 320

30 May

by Mihály Tatár


Good Morning!


  • Markets remained frantic and sentiment was all about Italy on Tuesday as well  – as veteran geopolitical strategist David Goldman noted, ’this is not a drill. This is the real thing. The giant popping sound you hear is Italian government debt evaporating.’ . Traders anxiously kept moving out from risk and into safe haven assets (SPX -1.16%, DAX -1.53%, MIB -2.65%, Nikkei -1.61%, Shanghai -1.53% – the latter two also on Trump increasing the pressure on China and announcing the first wave import tariffs from 15/June -, EURUSD 1.15, US 10Y bond yield 2.76% – this is the largest move since the Brexit vote), and Italian bond yields exploded higher (2Y to 2.83% from -0.33% in early May, 10Y yield to 3.5% from the pre-elections 1.80%). The put the latter moves in perspective, Italian interest costs just jumped to an additional 4% of GDP (total debt is 130% of their GDP, 2.3 trillion USD). To be sure, the political incompetence was on full on display again when European Budget Commissioner Oettinger talked about ’financial markets teaching a lesson to voters’ – to be fair, this was such an act of self-destruction that even Juncker and Tusk intervened, stating the need of respecting voters. But the damage was done, and the League and Five Star now poll 60% together. The latter is crucial, because while optimists point out that ’the worst fear, Italy leaving the euro or Spain having an unfriendly government is still very low probability’, the reality is that Italy is big enough to gradually erode the Eurozone from the inside, if it wants to. (For example, even if the ECB were to intervene now – causing a larger relief rally – would that change the plans of a Salvini government to start large spending projects and print quasi money? No. And the ECB can’t even stay away to force the new government into submission as in the case of Greece, because you can not blackmail someone who is not afraid to divorce from you. What can the ECB do if Italy violates monetary rules? Eject Italy? Bail out Italy for the second time? Neither will fly. No wonder George Soros is so depressed ’the EU is in an existential crisis. Everything that could go wrong has gone wrong’.


  • Regional currencies were hammered again, with the Italy-related risk aversion and also on the more concrete EU plans to decrease transfers, with several key levels being broken (EURHUF 320.80, EURPLN 4.3410, even EURCZK 25.94), with local bond markets under pressure as well. (To be cynical, I am not sure about this fuzz – from the looks of it, the region will look like the island of stability in the coming years compared to the core Eurozone. Of course, as discussed here for years, yields are artifically low in CEE and central banks will prefer weakening their currency to a growth-shrinking montery tightening or against any outside shock.)


Have a nice day,



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