Italian markets put a brave face on

In the absence of fresh direction from Wall Street, European markets are creating their own positive impetus.


In the absence of fresh direction from Wall Street, European markets are creating their own positive impetus.

Italy lifts, oil drags

Italy leads the challenge for markets to look on the bright side of a gloomy week, though the FTSE MIB was sharply off its best levels on the very last look. So far U.S. indices may not follow suit, looking at electronic futures. They are definitively lower, at least partly to capture some of bearish trend outside of the U.S. during the Thanksgiving break. Oil is the key worry that could yet crack improving sentiment. Participants in that market are beginning to require more solid evidence that Saudi Arabia is prepared to defy Washington calls not to crimp supply. All key energy futures are in the red. (Nymex Nat. Gas is 4% lower despite inclement weather across much of the U.S.) Stock markets will keep an eye in the rear-view mirror for better oil prospects as they test the floor.

Nothing to see in Italy

Unfortunately, as has frequently been the case this year, the backing for Italy’s bounce doesn’t look great. EU Affairs Minister Paolo Savona is the latest senior official in recent months to deny he’s about to step down. It will be his job to deliver in practice the coalition’s defiance of Union prescriptions for which the budget is the vehicle. The optimistic interpretation of his possible wavering is that he no longer relishes the job. That would underscore persistent impressions of coalition disunity at the margins. How else could the notion that deputy PM Matteo Salvini was ready to renegotiate the budget reach the press? He later said he would not backtrack. His counterpart deputy, Di Maio said he wouldn’t “change a comma”. Someone within their ranks would. That is what investors are prepared to buy, at times. The uplift to sentiment has enabled yields on Italy’s 2-year bonds, amongst the most volatile, to reach a two-week low, though with help from soft EU PMIs.

Italian 10-year bond firm this week

For now, our BTP technical analysis model suggests optimistic interpretations are gaining precedence. The most closely watched BTP yield and its spread to benchmark bunds has pulled away from October’s peak for a second clear week. In doing so it’s messed up the clear rising line which corroborated decent chances that investors would demand higher borrowing costs for the foreseeable future. The trend spanned from at least 2.88% in mid-September to about 3.5%, where it breached on Wednesday. The break was accompanied by the first three straight daily declines since early November. Bond investors will keep an eye on the rough 3.30% area, where the yield has bounced repeatedly since the beginning of October. Any fall below ought to signal an even higher expectation of a resolution that avoids ratcheting volatility higher again.

Technical study: Italy 10-year BTP – daily interval: 23/11/2018 12:33:58

Source: Refinitiv/City Index

Bears stalk Italy

Still, bearish bets in Italy are more deeply entrenched than superficial sentiment. For instance, the amount of Italian bank shares on loan to short sellers is at a 15-month high. Italian stocks are also slightly worse off than Germany’s DAX. The markets are down 14.4% and 13.7% respectively this year. Both underperform large EU counterparts as all markets grapple with deteriorating trade relations and economic turbulence perceived ahead.

Trade gap ahead

On that broader front, the ground keeps shifting ahead of next week’s meeting between President’s Trump and Xi at the G20 summit. Note Beijing’s and Washington’s attempts to mould the public agenda beforehand. Vice President Pence’s terse commentary opened the week, sobering sentiment in its wake. Trump is convinced, apparently, that “China wants to make a deal very badly - because of the tariffs". Vice Commerce Minister Wang Shouwen has been more measured. He seeks a “basis of equal consultations, mutual benefits and trust”. There is a mismatch. As the event approaches, global markets are likely to become re-sensitised to headlines that underline such differences.

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