Early Monday morning investors awakened to what was being presented as a new market headwind – the resignation of Italian Prime Minister Mario Monti. However, I do not view Monti’s resignation nor the first quarter Italian general election as presenting renewed systemic risk in Europe. Yes, a conversation regarding anti-austerity policies will resurface, but that will not reverse the positive momentum from ECB President Mario Draghi’s commitment to buy sovereign debt.
Former Prime Minister Silvio Berlusconi grabbed the headlines with his announcement to run again in the March general elections, on an anti-austerity/challenge Germany platform. Now, 48 hours removed from the “headwind” announcement, the evidence has quickly dismissed the news from Italy as nothing more than the introduction of more “noise” for investors that will likely persist over the next few months. If this were truly of concern and to be perceived as enough of an issue to reverse the ECB’s OMT positive market impact, would the evidence present itself as follows?
• The euro currency (Figure 1.1) has appreciated back above 1.3000 and is trading in the upper half of this year’s 1.2043 to 1.3487 trading range.
• The Italian 10--Year Treasury yield (Figure 1.2), which spiked to 4.90% on the headline, has subsequently fallen back to 4.70%.
• The German DAX (Figure 1.3), which we continue to use as our global equity index indicator, trades this morning to a fresh 2012 high at 7616.80.
• Italy this morning auctioned 12-month bills with an achieved target of EU 6.5 billion; average yield 1.456% vs. 1.762% at November 13 auction.
Beyond the evidence presented from the capital markets in the last 48 hours, there are the realities of the actual Italian general election. Current polls place Berlusconi and his anti-austerity People of Freedom party running around 18%, slightly ahead of the Five Star Movement party at around 17%. Pier Luigi Bersani’s Democratic party currently holds a commanding lead in the polls with about 35% of the vote. In April 2008, Bersani lost to Berlusconi, 37.4% to 33.2%. Now the front-runner, Bersani has firmly supported Monti and his austerity measures.
Despite the attention-grabbing headlines, the collective evidence does not support a fundamental change in Italy’s current economic policy of favoring austerity.
Figure 1.1 Euro Currency Year to Date
Figure 1.2 Italian 10-Year Treasury Yield Last 45 Days
Figure 1.3 German DAX Trades to a New High for 2012