This morning American investors were greeted with the sight of Italian bond yields running wild to the upside as the political situation deteriorates and elections loom this fall.
Here’s the ten second version: The Five Star Party (an assembly of anarchists and, literally, comics and clowns) are like the dog that caught the car – they won a lot of seats in March and now they don’t know how to govern. They are joined by the extreme nationalism of the League, another voting bloc that despises Europe and wants to exit the common currency.
But it’s a wreck.
Here’s are two dueling statements, one from the nationalists and another from the Italian political establishment, via the Washington Post:
“The upcoming elections will not be political, but instead a real and true referendum … between who wants Italy to be a free country and who wants it to be servile and enslaved,” said League leader Matteo Salvini on Monday, raging against the European establishment. “Today Italy is not free; it is occupied financially by Germans, French and eurocrats.”
The populists’ critics accused them of fiddling while Italy teeters toward a new economic crisis, the value of its bonds slumping over fears of what could come next.
“They were supposed to govern, but they’re fleeing their responsibility: either they aren’t capable, or they’re afraid,” wrote former Italian prime minister Matteo Renzi in a Facebook post about the populists. “In recent weeks they’ve burnt billions of savings of the Italians, with scatterbrained statements on the euro, on our debt, on the future. And today, instead of jump-starting the government as they could easily have done, they attack the President of the Republic, calling for his impeachment.”
And in the absence of certainty, Italian debt is falling, yields are spiking and the old concerns about economic crises, containment and contamination, etc are hitting stocks all over the world.
US fixed income pros remind us that Italian bond yields have been artificially low because of continental QE for years and are only now beginning to re-price in the reality of debt situation and the political condition of the country. The fact that this is all happening at a moment where the Turkish lira and the Argentine peso are having their own very visible struggles is noteworthy in terms of what it means for near-term sentiment. Sentiment drives prices and attitudes in the short-term.
And in a global market, no one should be surprised to see this sentiment spread into other markets, other asset classes.
If any of this seems hauntingly familiar, it’s because we lived through this episode in a prior season back in 2010 but it involved Greece. Then there was a spinoff series about Britain back in 2016. Hollywood is seriously running out of new ideas for shows.