May 24, 2018

Italian debt puts markets under pressure

Management comment

The markets continued to fear the consequences of the projected formation of a government in Italy. Italian long-term rates adjusted by around 60 basis points over the past week. Anticipating an immediate implosion of the eurozone nonetheless seems a little premature. The Greek scenario demonstrated that remaining within a strong monetary region governed by Germany ultimately outweighs the supposed advantages of a disorderly exit and the installation of a local currency.

On the other hand, observing that the euro and the monetary zone as a whole are still under development and constantly evolving is a matter of common sense. Similarly, stating that a majority of Italian voters consider the European project insufficiently beneficial or generous is an understatement. Although Italian government bonds are likely to come under heavy pressure over the next few weeks or months as the new government’s propositions are announced, it should be noted that two-thirds of Italian debt is held by domestic investors.

Furthermore, given the moderate size of the total debt market (€2,700bn), only €8bn or so is traded daily. This factor will not prevent speculative trends from forming however. Among the emerging markets, the extreme difficulties faced by countries such as Turkey and Argentina also serve as a reminder that a state deficit inevitably destabilises the local currency and the broader economy. Tensions, threats and negotiations between the US and China over trade agreements and the Korean summit have also heightened investor anxiety.

All of these factors have increased the dollar’s safe-haven status, amid a global questioning of multilateralism and the accumulation of private debt within almost all economies. If there is a downturn in macroeconomic momentum, particularly in Europe, a further correction among markets may be feared, exacerbated by capital outflow. The downturn in the euro is good news however, enhancing the competitiveness of European exporters. 

Igor de Maack, Fund manager and spokesperson at DNCA. This article was finalised in May 24th, 2018.

This promotional document is a simplified presentation and does not constitute a subscription offer or an investment recommendation. No part of this document may be reproduced, published or distributed without prior approval from the investment management company.

DNCA Investments is a trademark held by DNCA Finance

The markets continued to fear the consequences of the projected formation of a government in Italy. Italian long-term rates adjusted by around 60 basis points over the past week. Anticipating an immediate implosion of the eurozone nonetheless seems a little premature. The Greek scenario demonstrated that remaining within a strong monetary region...
2018-05-24