For those who stayed away from market news over the holiday weekend, this is what happened and why we are here today: Italy PM-designate Conte gave up on efforts of forming a government after Italian President Mattarella rejected Eurosceptic Paolo Savona for the Economy Minister position because the appointment would have “alarmed markets and investors, Italians and foreigners” (yes, very ironic in retrospect, although just as we predicted would happen). Mattarella then summoned former-IMF senior director Cottarelli to meet in a move viewed by some as laying the groundwork for a technocratic government. Forza Italia said they would not support this government, and 5SM and League set their sights on the now highly likely new elections (touted from September 9th). Both 5SM and League saying they will evaluate their coalition in these new elections.
Meanwhile, on Sunday Italian President Mattarella gave a mandate to form a government to ex-IMF official Cottarelli, while PM-designate Cottarelli accepted the mandate and sees elections at the start of next year. In related news, League leader Salvini said he hopes there will be a government in October for the approval of the budget law and to avoid a VAT increase and M5S leader Di Maio wants elections as soon as possible, while Forza Italia’s Berlusconi said his party will reject the Cottarelli government.
At the same time, the Spanish Parliament started the process for a no confidence vote against PM Rajoy, while it set the date for debate and vote of confidence on PM Rajoy’s government for May 31st and June 1st.
In short: for those who missed the crazy, volatile days of 2011, here is your change to relive them, and here is the mandatory sea of red to go with it.
But what is different this time, is that while the risk-off sentiment is spreading across risk assets around the world, with Italy and Spain leading declines in European stocks and U.S. equity-index futures also sliding amid soaring contagion fears, with the euro also slammed below 1.16 pushing the yen and USD higher along with gold, it is unclear just what the ECB can do this time, which back in 2012 unleashed the threat of “whatever it takes” to halt the last Italian collapse.
Well this time, “whetever it takes” has been running non stop since July 2012, and the ECB is rapidly running out of bonds to monetize, so it may well be that we are finally approaching the end of the European experiment, unless of course Draghi gets a greenlight from Merkel to start monetizing everything – stocks, bonds, and anything else that is not nailed down – in hopes of stabilizing markets. And before it is all over, he will, just as Europe will file criminal charges against those who dare to short Italian bonds. For now, however, as we showed earlier, Italian bonds are crashing with 2Y yields plunging the most on record, Italian-German spreads exploding, Deutsche Bank stock tumbling below €10 for the first time since September 2016, and Italian bank CDS blowing out.
Hera are some of the key charts from this morning’s Italian avalanche:
The contagion is tangible: while the FTSE MIB is back to July lows, Spain’s IBEX 35 is down the most since February…
In fact, all major European benchmarks are also now in the red for 2018, except France’s CAC 40. Even more important, the declining euro isn’t acting as a cushion for exporter-heavy indexes like the DAX, which is also heavily in the red today.
The downfall in Italian banks has spread across the continent with major losses for the likes of Commerzbank (-5.0%), BNP (-4.6%), RBS (-3.8%), Credit Suisse (-3.8%) all resting at the foot of their respective indices. Meanwhile, Europe’s biggest bank, Deutsche Bank, is back under €10 and just shy of all time lows:
You get the picture.
In short, everyone is only focused on one thing: Italy’s domestic politics. As a reminder, Italian President Mattarella yesterday gave a futile mandate to ex-IMF official Cottarelli to form a technocratic government. Cottarelli’s list of Ministers is expected to be unveiled today, moving the process to a vote in the Italian parliament (League, 5 Star and Forza Italia have majority) where a snap election – now also dubbed a Euro referendum – appears inevitable.
The question now is what the ECB will do: not only how will Draghi stem this outright liquidation of everything Italian, but whether the ECB’s tapering plans are now indefinitely postponed, and/or whether it is time for even more QE.
While Europe is once again a basket case, Asia traded mostly subdued as the region lacked impetus following the market closures in US and UK, while recent weakness in oil prices and political uncertainty surrounding Italy and Spain have added to the cautious tone. Nikkei 225 (-0.6%) was the worst performer as Japanese exporters suffered from flows into the JPY, while Japan Display shares led the declines in Tokyo with losses of over 20% seen in early trade after reports that Apple is to switch to OLED screens on all iPhone models from next year, which in turn underpinned South Korea’s LG Display. ASX 200 (+0.2%) was lifted by strength in its largest weighted financials sector and as energy names shrugged off the recent aggressive pull-back in crude prices. Shanghai Comp. (-0.5%) failed to maintain the early support from a firm PBoC liquidity operation and eventually slipped amid the broad risk-averse tone, while Hang Seng (-1.0%) was weighed by losses in blue-chip property and energy names.
In macro, aside from the ongoing “flight to safety” surge in the dollar which is now at the highest since November…
Market Snapshot
- S&P 500 futures down 0.8% to 2,697.00
- STOXX Europe 600 down 1.7% to 383.12
- MXAP down 0.4% to 173.10
- MXAPJ down 0.8% to 564.05
- Nikkei down 0.6% to 22,358.43
- Topix down 0.5% to 1,761.85
- Hang Seng Index down 1% to 30,484.58
- Shanghai Composite down 0.5% to 3,120.46
- Sensex down 0.5% to 35,000.77
- Australia S&P/ASX 200 up 0.2% to 6,013.56
- Kospi down 0.9% to 2,457.25
- German 10Y yield fell 14.8 bps to 0.196%
- Euro down 0.7% to $1.1539
- Italian 10Y yield rose 22.0 bps to 2.417%
- Spanish 10Y yield rose 17.3 bps to 1.698%
- Brent futures up 0.1% to $75.37/bbl
- Gold spot up 0.2% to $1,302.15
- U.S. Dollar Index up 0.6% to 95.00
Top Overnight News from BBG:
- Italy’s populist leaders, incensed by a failed bid for power, began mobilizing for an early election even as premier-designate Carlo Cottarelli puts together a cabinet to present to the head of state
- Italy’s Five Star Movement’s support drops to 29.5% from 31.1% a week earlier, League up to 27.5% from 24.5% in SWG opinion poll published on Tuesday
- “We must never forget that we are only ever a few short steps away from the very serious risk of losing the irreplaceable asset of trust,” Bank of Italy governor and ECB Governing Council member Ignazio Visco says in speech in Rome
- A gauge measuring the likelihood of Italy leaving the currency union within the next 12 months jumped to 11.3 percent in May from 3.6 percent in April, according to research group Sentix
- A Bank of England spokesman refuted suggestions of a rift between the central bank and the U.K. Treasury after a report in the Financial Times said the institutions are at “loggerheads” over the future of City of London regulations after Brexit
- Spain’s government nominated Pablo Hernandez de Cos to head the country’s central bank, backing a fiscal conservative for a job that includes a say in European monetary policy.
- Oil headed for its longest run of losses since February as Saudi Arabia and Russia mull easing curbs on crude production as concerns grow over supply shortages
- North Korean leader Kim Jong Un has dispatched one of his top aides to the U.S. for talks ahead of his planned summit with Donald Trump next month, according to a person familiar with the issue
- The Fed should slow its pace of policy normalization to help re-align price expectations around 2 percent and maintain the credibility of its inflation target, Fed’s Bullard said Tuesday in Tokyo
- The Turkish lira strengthened the most in the world on optimism the central bank’s decision to bring clarity to its interest-rate regime is a sign it may be able to fight the currency’s depreciation without pressure from President Recep Tayyip Erdogan. Stocks and bonds also rallied
Asia traded mostly subdued as region lacked impetus following the market closures in US and UK, while recent weakness in oil prices and political uncertainty surrounding Italy and Spain have added to the cautious tone. As such, Nikkei 225 (-0.6%) was the worst performer as Japanese exporters suffered from flows into the JPY, while Japan Display shares led the declines in Tokyo with losses of over 20% seen in early trade after reports that Apple is to switch to OLED screens on all iPhone models from next year, which in turn underpinned South Korea’s LG Display. ASX 200 (+0.2%) was lifted by strength in its largest weighted financials sector and as energy names shrugged off the recent aggressive pull-back in crude prices. Shanghai Comp. (-0.5%) failed to maintain the early support from a firm PBoC liquidity operation and eventually slipped amid the broad risk-averse tone, while Hang Seng (-1.0%) was weighed by losses in blue-chip property and energy names. Finally, 10yr JGBs were higher amid recent upside in T-notes and declines in US yields, although the gains for Japanese bonds were only modest amid a mixed 40yr auction which printed a higher b/c but lower prices from previous.
Doomer Doug, a.k.a. Doug McIntosh now has a blog at www.doomerdoug.wordpress.com
My end of the world e book “Day of the Dogs” will soon be available for sale at smashwords. The url is
https://www.smashwords.com/books/view/267340 It is also at the following url
http://www.amazon.com/-/e/B007BRLFYU
