Idea of the Day: Warming on Italy
City Index August 3, 2017 10:23 AM
There’s always something to love about Italy in August, but it’s not usually the economy. However, a recent run of decent economic data, including industrial data and the service sector PMI for July, which reached its highest ever level, has made investors stand up and take notice.
What: There’s always something to love about Italy in August, but it’s not usually the economy. However, a recent run of decent economic data, including industrial data and the service sector PMI for July, which reached its highest ever level, has made investors stand up and take notice. There are the fundamentals of a strong economic recovery story emerging in Italy, and it could have further to go.
Aside from the economic data, there have been other factors that have brightened Italy’s outlook, including a positive surprise in earnings for Unicredit for Q2, it reported profits of EUR 945mn and reduced further its exposure to non-performing loans. This suggests that the stronger banks in Italy may be past the worst after last year’s scare when Monti di Paschi required a state sponsored bailout.
Sovereign risks have also receded, the Italian 5-year CDS spread has fallen to its lowest level since 2009, suggesting that sovereign default fears have fallen sharply. This is also reflected in the spread between Italian and German bond yields, which had lagged behind Spanish and Portuguese yield spreads, but as you can see in the chart below, Italy has started to play catch up.
How: We believe that this suite of good news for Italy could trigger further gains in the FTSE MIB, the main Italian stock index. This index is close to its highest level since May, when the index faltered at 21,828. Today’s data boost could see the market clear this significant resistance level, which would open the way to further gains towards 22,000 and beyond.
A strengthening Italy, especially its banking system, also reduces the pressure on the ECB to maintain a very loose monetary policy stance. We have mentioned in previous posts that for EUR/USD to continue its march higher then the ECB needs to at least talk about reducing stimulus, something it has avoided so far. If Europe’s weakest link is improving then the ECB may have the confidence to talk about a taper of its APP programme potentially at this month’s central bankers’ conference in Jackson Hole, which could be enough to trigger further euro strength, especially vs. the USD, JPY and GBP.
Chart 1: Eurozone yield spreads, Italy playing catch up
Source: City Index and Bloomberg
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.