Search ForexCrunch

Analysts at Rabobank note that a year on Eurozone political turmoil is back as peripheral bond yields are soaring, and demand for safe haven assets is at heightened levels.  

Key Quotes

“While Italy has descended into chaos, the Spanish government is facing a vote of no-confidence at the end of the week. The Rajoy government may survive, despite a damning court ruling in a corruption case involving members of the ruling People’s Party.   By contrast, Italy almost certainly faces months of confusion.”

“There was never any real hope that this year’s Italian election would bring a market friendly result. Remarkably, however, the market managed to under-price risk for months.   Over the spring a spate of softer than expected economic data in the Eurozone started to scratch away at investor confidence in EUR assets.”

“In the last few weeks the realisation that EMU coherence may again be under threat from Italy’s populist tide has triggered a wave of position adjustment which has reached panic levels in peripheral bonds this morning.   Although President Mattarella has tapped former IMF official Cotterelli to lead a transitional government, there is little expectation that this government will be endorsed by parliament meaning that fresh elections are likely, potentially as soon as September.”

“Meanwhile, investors are facing up to the fact that the populist mood is unlikely to have turned by then.   The leaders of the Five Star Movement and the League, who were on course to form a government last week until the President refused to endorse their choice of (anti EMU) Finance Minister, have called for mass mobilisation against the President on  June 2.     In the eyes of many Italian voters, Brussels is at least partly to blame for the country’s stagnant growth levels and still relatively high unemployment levels.”

“Unrest may be growing on its Southern flanks but it is Eastern units which may be about to suffer the wrath of the Brussels. The EU has been considering linking the subsidies it pays to member states with adherence to the rule of law.   Poland’s populist Law and Justice Party may have defied its critics by creating growth and employment through fiscal giveaways, but its judicial reforms have been highly contentious.”

“Latest reports suggest that Brussels could shift more than EUR30 bln in EU funding away from central and Eastern Europe and direct it instead at Italy, Greece and Spain.   How much extra funding Italy secures can be expected to be tied to the leaning of the next government.”

“Despite the turmoil in Europe, the TRL is attempting to hold onto a better tone. Yesterday’s news that the central banks was simplifying its interest rate regime was taken positively by investors, though USD strength is proving to be a tough headwind.   Following last week’s dramatic rate hike, the market is expecting the central bank to maintain a hawkish tone at next week’s scheduled policy meeting.”