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Italy’s at a political stalemate that looks to drag on for weeks. Since the election on February 24/5 there’s been no movement in either the ability of the major parties to form a coalition or determine a President. Despite an initial agreement between Bersani and Berlusconi yesterday to support the former Speaker of the Senate and former President Franco Marini as President, the Bersani camp has since split on the candidate in favor of the old Eurocrat Romano Prodi, which both Berlusconi and Grillo squarely reject.

After four rounds of votes for President there is still no candidate. Another vote has been scheduled for tomorrow – we’re not holding our breath on a candidate being announced.

So where’s Italy at?  Without a President, there is no one to appoint a Prime Minister, or dissolve the parliament and call new elections over the current PM stalemate.

What does it likely spell?  Many weeks, if not months, before we get some agreement on a ruling government (maybe Monti will come back in a ceremonial “technocrat” role?). Ultimately, new elections appear the only option given the inability of the major parties to compromise over a coalition. Keep in mind that the earliest elections can take place is 45 days after parliament is dissolved. Further, as summer and recess (holiday) approach the time table could be pushed out further.

The market is still not pricing in a lot of risk around this political uncertainty.  Why? We think the market is squarely behind the promises of ECB head Draghi and the Eurocrats in their pursuit to save the Union at all costs and prevent contagion. We, however, have a real-time short position in Italy via the etf EWI and are short the EUR/USD via FXE taking advantage of time and price.

Italy At Loggerheads, Continued; Europe by the Charts - vv. italy cds

Italy At Loggerheads, Continued; Europe by the Charts - vv. all yields

Odds and Ends


Earlier this morning German Finance Minister Wolfgang Schaeuble said that the ECB should reduce liquidity in the Eurozone. This sent equity markets falling but we want to note that this statement is either misquoted or not the intention of Schaeuble. This is after all, the same Schaeuble that has recently come around on France having an extra year to meet its deficit target because otherwise the country would plunge into recession.

Further, today the European Economics and Monetary Affairs Commissioner Olli Rehn said that the Eurozone will dial back on austerity measures to help reinvigorate growth.

Make no mistake about these doves. These Eurocrats are doing their part to keep the dream of the Union alive.

Charts That Matter


Below are four charts we wanted to call out from the week. While none of them add value shock, they support continuing themes we see playing out.

  • Eurozone CPI – Inflation fell to 1.7% in MAR Y/Y, under the ECB’s target of 2%. This is good for the consumer and rhymes with our #StrongDollar call. We think the ECB is setting up for a rate cut in 2013. While it’s likely not to come until 2H, it’s additional powder that the Bank may have to use to help revive the economy and change the tide in the negative data that’s been released.

Italy At Loggerheads, Continued; Europe by the Charts - vv. eurozone cpi

  • UK CPI – held steady at 2.8% in MAR Y/Y. Despite the country’s pains of austerity, we have a bullish disposition on Mark Carney joining as next BOE governor in July. From the few comments he’s given we expect him to largely stick with the current monetary stimulus program (375B GBP), but to better manage expectations around inflation and better manage confidence around a struggling economy through marginally hawkish policy.

Italy At Loggerheads, Continued; Europe by the Charts - vv. uk cpi

  • German Confidence – The ZEW survey came out this week and showed that 6M forward looking economic expectations fell hard in APR.  While Germany is the lead horse benefitting from the Eurozone (and a weaker EUR), it is not immune to the downturn as growth (and trade demand) from its neighbors, its main trading partners, remains muted.

Italy At Loggerheads, Continued; Europe by the Charts - vv. germany zew

  • Car Registrations Down – This is yet another data point we use to evaluate health and confidence from the consumer. This charts is holding steady in negative territory.

Italy At Loggerheads, Continued; Europe by the Charts - vv. eu car

Have a great weekend! 

Matthew Hedrick

Senior Analyst