It(aly)'s Getting Darker At Luciano Pavarotti's 'O Sole Mio

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Includes: BBVA, DB, EUFN, EWG, EWI, EWP, EZU, FXE, IITOF, IITSF, ISNPY, PGAL, UNCFF, UNCRY, VGK
by: The Fortune Teller
Summary

Italy can't seem to stop creating headlines.

The latest reports of the country's reducing its deficit faster than expected are nothing but a temporary false sigh of relief.

"I'm truly convinced that Italy would solve most of its problems if it had its own currency" - Claudio Borghi.

I'm truly convinced that these "budget reduction" hopes will be short-lived won't hold water.

Che bella cosa na jurnata 'e sole,
n'aria serena doppo na tempesta!
Pe' ll'aria fresca pare già na festa...
Che bella cosa na jurnata 'e sole.

(English Translation:
What a beautiful thing is a sunny day.
The air is serene after a storm,
The air is so fresh that it already feels like a celebration.
What a beautiful thing is a sunny day.)

Unfortunately, Luciano Pavarotti is no longer with us, and without him, his beloved Italy is not as shining as it was at the time he left this world, eleven years ago (The greatest tenor passed away on September 6th, 2007).

Italy (EWI) continues to make the headlines this morning. Following the past few days carnage that saw prices of both Italian stocks and bonds collapsing, it seems like Rome is trying to lower the flames today with reports the country may cut its budget deficit to 2% as early as 2020, a faster pace than previously thought.

The shift happened on the heels of the country's 5-year default probability jumping to almost 21% as Deputy PM Luigi Di Maio said yesterday that the Italian government will not retreat by even a "millimeter" from its 2.4% budget deficit target.

So he said...

As we all know, just like actions talk louder than words, markets talk much louder than promises; especially those made by Italian politicians these days.

Italian assets are breathing a sigh of relief with equities reversing early losses as the leading FTSE MIB index is now up 1.3%. The Euro (FXE) rebounded (albeit slightly) from six-week lows, and the yield on Italy 10-year bond is down 12bps (at the time of writing) to 3.35% from yesterday's peak at 3.47% - the highest level since 2014.

Italy 10 year bond yield at 3.47%, highest since 2014

Allow me to be blunt and say one word: Ridiculous!

I see very little odds for Italy being able to stave off its problematic debt blowout as early as in 2020 (or at all, i.e. foreseeable future).

As the Italian government is due to discuss budget later in session, the target deficit falling to 2.2% of GDP in 2020. This is, in my opinion, a temporary move that won't hold for too long.

Why temporary? Because the boot country, currently led by a right-wing, anti-EU, government doesn't, can't, and won't comply with the EU/ECB requirements. Doing so will be nothing short of shooting themselves in their own... boots. This is neither warranted politically, nor in line with their economic agenda.

Don't believe (or agree with) me? Perhaps you'll find it easier to do so after listening to Claudio Borghi, one of the League party lawmakers, who just said - loud and clear - in a radio interview:

I'm truly convinced that Italy would solve most of its problems if it had its own currency

The Italian 2-year bond spread is down even more, ~25bps, as the government is said to reduce budget deficit targets for 2020 and 2021.

Folks, let's not mix hopes with facts, expectations with abilities, fantasy with reality.

1. Stock prices of Italian banks - UniCredit (OTCPK:UNCFF, OTCPK:UNCRY), Intesa Sanpaolo (OTCPK:IITOF, OTCPK:ISNPY, OTCPK:IITSF), etc. - are down almost 15% over the last couple of days, since last Thursday.

2. Since its late January 2018 peak, the iShares MSCI Europe Financials ETF (EUFN) has lost almost 1/4 of its value, led by banks like BBVA (BBVA) and Deutsche Bank (DB).

Chart EUFN data by YCharts

3. Italian 10-year bonds are yielding the most relative to similarly dated German (EWG) debt since 2013.

4. Italian 10-year bonds are yielding the most relative to Spanish (EWP) bonds since the beginning of 2012.

5. Italian 10-year bonds are yielding the most relative to Portuguese (PGAL) debt in decades.

Last but not least, investors should ask, is an inflationary shock just around the corner for Europe (VGK, EZU)?

Truth is, it's hard, if not impossible, to remain optimistic about Europe as a whole, or about Italy specifically. So, we don't... and neither should you!

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