Swan Lake – May 30

Italy’s president has attempted to broker an eleventh-hour deal between the country’s two largest populist parties to avoid another destabilising national election, helping Italian assets recover from a sell-off that rattled investors worldwide.

Sergio Mattarella, who triggered this week’s crisis by blocking the appointment of a Eurosceptic finance minister proposed by the two parties last Sunday, held informal meetings with leaders of the anti-establishment Five Star Movement and the far-right League on Wednesday evening.  FT

Political noise will be elevated in Italy through the summer, and investors and traders should excogitate a strategy and execute it.  Discount the day-to-day noise. 

Italy’s auctioned 5 and 10-year bonds today,

Italy successfully sold five- and 10-year debt at an auction, bringing some relief to jittery markets following this week’s meltdown in the nation’s bonds amid a political crisis.

…Both auctions were oversubscribed by investors, buoyed by large reinvestment flows from a bond maturing later this week. Still, the pricing of the longer-dated note showed signs of the pessimism that has battered the market this week.   – Bloomberg

Check out today’s auction results versus Monday here and here.   Note today’s 10-year auction 1.48 bid-to-cover relative to 2.23 in Monday’s auction.

The two major factors to watch are:  1)  the polls and to whether Italian voters solidify their support for the euro currency, or harden their positions against it, and 2) if 5-Star and Lega move forward to form a government,  who will be the finance minister in the new government?

Increasing  fear among Italians of an ITALEXIT  as the markets punish the country  is the hope bet of many in the EU.   Even the majority of the Greeks, during the height of their debt crisis,  didn’t contemplate leaving the euro.

“My concerns and expectations are that the coming weeks will show that developments in markets, government bonds and Italy’s economy could be so drastically impacted that they serve as a signal to voters not to vote for populists on the right and left.”  – Guenther Oettinger, a German EU commissioner


Big snap back in Italian sovereign spread and sharp yield curve steepening.  Looks like big short cover in 2-years.   Euro banks did not recover as much.

EM mixed.   Dip buying algos and traders rewarded in U.S. equities.



This entry was posted in Black Swan Watch, ECB, Euro, Eurozone Sovereign Spreads, Italian Yields, Italy, Uncategorized and tagged . Bookmark the permalink.

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