Displaying items by tag: Italy

(New York)

Stock across the developed world went into freefall today as news spread of the explosion of the coronavirus in Europe and the subsequent quarantine that has been put in place in Northern Italy. Additionally, US data shows business activity contracted for the first time in four years in February. The S&P 500 and Dow are both down about 3.4% at the time of writing.

FINSUM: The virus is now no longer contained to China, with Italy sporting 150 cases and three deaths. Chip companies, travel and tech are getting hit the hardest.

(Frankfurt)

New data on the EU economy has just come in and it isn’t pretty. Overall, the bloc grew just 01% in the fourth quarter, while Italy and France actually contracted. According to Commerzbank, “The spectre of recession is back … Economic growth in the eurozone came to a virtual standstill at the end of the year . . . The ECB is likely to view this with concern”. Ironically though, this may be positive for market as the ECB is likely to take an even more dovish approach.

FINSUM: It feels like we just did a time warp back to around 2013, when central banks were ready to stick to ZIRP for years. We all know how stocks performed then!

(Rome)

Italy looks like it is in bad shape. It is openly defying the EU’s budget rules by running an excessive deficit, and what’s worse, it looks likely to be downgraded to junk status by ratings agencies. Moody’s already downgraded the country to Baa3, its lowest investment grade rating and just one rung above junk status. Yields have been swinging wildly on the country’s bonds as a result.

FINSUM: We are quite worried about the implications if Italy gets downgraded to junk, as it could mean lots of funds need to sell the bonds because of their mandates. What kind of sell-off could that spark?

(New York)

Have you heard of the new “doom loop”? The term may seem vaguely familiar, and follows in a long line of sensationalist financial terms. Just like in its origin during the European debt crisis, the term once again refers to a European state sinking under the crushing weight of its own debt. You guessed it, Italy. The doom loop refers to the European bank habit of loading up on sovereign bonds, and in turn creating a negative reinforcment cycle where bonds fall in value, which leads to serious concerns over a bank meltdown, which then exacerbate the original economic fears. That is exactly what is now occurring after Italian bonds sold off steeply following the country’s wild budget approval.

FINSUM: Italy is one of the very largest debt markets and economies in the world, and a full scale meltdown there would surely impact global markets, even the Teflon-coated US stock market.

(Rome)

Investors in stocks will be familiar with the market’s habit of focusing on an issue for a week or two, getting anxious, and then moving on almost completely once things looks even half-resolved. That is exactly what happened with Italy’s debt crisis a few months ago. However, this problem looks likely to rear its ugly head again. Italy is the third largest debt market in the world, and its looks dangerously close to imploding. That may be why Trump offered Italy funding to help its situation. The big fear is a near-term budget vote where the country’s parties are considering a package that would offer a flat tax rate and universal income for the left, all while ballooning the deficit to 7% of GDP, way above the EU limit of 3%.

FINSUM: Italy is currently led by a pair of parties that hate the Euro, so it seems likely that they may tempt fate with this kind of package. However, there is a potential compromise in the works.