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Greg Gibbs, Analyst at Amplifying Global FX Capital, suggests that they are not convinced that this is the right time to turn risk-averse on Italy as after the initial shock of a populist Italian coalition government that wants to increase deficit spending on social handouts and challenge EU fiscal rules, it remains to be seen how far it will go.

Key Quotes

“They have complained of being “blackmailed” by the selloff in Italian assets.   And indeed the weaker equity and bond markets should convince them to proceed cautiously with policies that may threaten euro membership or ongoing support from the ECB’s Asset Purchase Plan.”

“As such, it is possible to see a rebound in Italian assets and the EUR if the new government does proceed cautiously. Furthermore, to the extent that there is capital flight from Italy, much of it may go to other European assets, resulting in little net outflow from the EUR.”

“The Italian 10-year yield spread over bunds has risen to a high since mid-2017, when Italian yields were retreating from the political uncertainty generated by the failed Constitutional referendum in December 2016.”

“We should also expect a higher level of risk premium to remain in Italian assets, which feeds through to somewhat lower business confidence and less certain expectations that the ECB will exit QE from September.   As such, if there is a rebound in the EUR, it may be limited and short-lived.”