By SA Multimedia :
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Felix Salmon had political-risk consultant Anna Szymanski on his edifying podcast this week and she broke down the situation in Italy:
The thing that everyone is looking at is the Italian two year bond yield, don't ask me why, but that seems to be the thing... it's negative when they win the election, it stays negative for months after they win, they announce they're going to from a government, it's negative, and then when it seems they're not going to form a government then it spikes up to +2.5%. And now it's back down to under 1% but it's still positive.
Anna, Why are we looking at the Italian two year bond yield?
The reason everyone's talking about it is because we saw the biggest spike that we've seen since I believe 1989 and you saw other anxiety in the market but the two year was what really moved and why the two year really moved appears to be a few things, but the main thing is that there was just a tremendous amount of selling pressure - you had a lot of macro hedge funds that were short selling, a lot of domestic investors who were trying to trim their positions and also you've had a lot of foreign investment into Italy in the past year... So you have a lot of selling pressure but no buyers.
On Russell Investments ' Market Week in Review podcast, Senior Investment Strategist Paul Eitelman and Rob Cittadini, director of Americas institutional, also discussed the market impact of the recent political crisis in Italy.
The Italian political crisis whipsawed markets the week of May 28, Eitelman said, beginning with President Sergio Mattarella's refusal to accept the finance minister nominated by a proposed coalition government of the 5-Star Movement and League parties. With this refusal, the proposed new government appeared on the verge of collapse - putting Italy on the cusp of moving toward new elections later this year, Eitelman said. This led to pretty significant damage to financial markets the following day, he noted: 2-year Italian government bond yields spiked from around 0.5% on May 28 to roughly 2.5% on May 29, with global equity markets also taking a hit. Why?
"What markets were extracting from this was the risk that, in a new Italian election, a populist coalition could garner even more power and, through that, endanger Italy's membership in the eurozone," he explained. The implications of a Quitaly scenario - in other words, an Italian exit from the eurozone - would be significant for European banks and the European economy at large, given that Italy is the third-largest economy in the eurozone, Eitelman said.
Fortunately, it appears that cooler heads may be prevailing, he said, as a new League/5-Star Movement coalition government - with a different finance minister - was officially approved by President Mattarella on June 1. This means that, from an investment strategy perspective, the political risks in Italy have probably eased somewhat, Eitelman said - noting that due to the recent selloff, Italian assets are now trading at more attractive valuations.
Fellow SA author Eric Parnell was a guest on Brian Bain's fantastic interview series this week to focus on Italy. Eric thinks what's happening in Italy will ultimately lead to the long, slow unwinding of the EU as we know it.
Events in Italy will embolden outsider groups in Spain, Portugal, and France as the longer voters feel left out of wealth being created the greater the problem in these countries becomes.
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