Monday, March 5, 2018

"Italian Election Weighs on Italian Assets, but Little Systemic Risk Seen"

Not so fast Mr. Chandler. First up, via Global Macro Monitor:

Tweet of the Day: Italy’s Impossible Trinity

Sounds like one of those "You can only choose two" scenarios.

And now, on to Marc to Market:
The Italian election results look a bit more euro-skeptic, but the not far from what the polls showed. Coalitions matter under the new electoral rules, and the center-right coalition appears to have the most votes, followed by the 5-Star Movement, and then the center-left in third. There were two surprises. First, the center-left did poorer, with the PD receiving only about half as many votes as they did in the last European Parliament election. Second, Berlusconi's political party also did worse than expected. It trailed the Northern League.

After the final count, the next step is for Italy's President Mattarella to let one group try to put together a government. The issue here appears to be whether it should go to the party with the most votes, or the coalition with the most votes. The former would imply the 5-Star Movement, though it has eschewed coalitions and other party leaders has indicated the sentiment was reciprocal. The latter would imply the center-right.

It is not clear the strength of the center-right coalition. Operas often have double-dealing and back-stabbing (defections in game theory), and the drama of Italian politics often seem have an operatic quality. It will take some time to sort this out, but Italy is in fine company. It took Belgium over a year to get a government after the last election. It took Germany four-months. Is it unreasonable to suspect that Italy will come in between those two markers?

Separately, and only underscoring the challenges that lie ahead, Italy's economy did not seem to have the same momentum as other large economies in the euro area, but its loss is even greater. The February service PMI fell to 55.0 from 57.7, and coupled with the disappointing manufacturing survey, the composite fell to 56.0 from 59.0. The pullback brings the composite back to levels seen in November, and it is still above last year's average.

Italian assets have been sold, after holding their own or outperforming in the run-up. The stock market is off 1.1%. Today's loss puts the FTSE Milan Index lower on the year (-0.8%), but it is the best performing of the major European markets this year. Within the G7, only the S&P 500 is up on the year (~0.65%). Italy’s benchmark 10-year yield is up four basis points to 2.0%. It is virtually flat on the year. The two-year yield is up two basis point to minus 19, which is an increase of about nine basis points this year. It compares to the eight basis point increase in Germany and 19 in Spain for a comparable tenor. The 10-year Gilt and 10-year Bund yield are near five-week lows of 1.45% and 62 bp respectively.

Other European equities are higher today, with the Dow Jones Stoxx 600 up 0.6%, snapping the four-day decline. All the major sectors are higher except financials with are slipping into negative territory in late European morning turnover. European 10-year yields are mostly lower. The euro has been in a cent range between $1.2270 and $1.2370. In European activity, the single currency has enjoyed straddled the pre-weekend close that was a little below $1.2320. There is a 519 mln euro option struck at $1.23 that expire today.

The eurozone service and composite PMI readings were a bit softer than the flash readings....