Global Head of Macro Strategy
There are two key known event risks linked to the situation in Italy today. The one is a purported meeting between caretaker prime minister Cottarelli and Italian president Mattarella after Cottarelli's inability to form an acceptable candidate Tuesday and rumours of a late-July snap election (the prior assumption was September-October) that brought an extra wave of risk-off/euro selling.
The second event risk is also key: an auction of some €5 billion in Italian BTPs (sovereign bonds) of five-, seven- (floating,) and 10-year maturities. The market will closely watch the yield and whether the market can even absorb this issuance.
Just yesterday we saw an auction of six-month Italian sovereign paper that resulted in a yield of +120 bps and a very weak bid-to-cover ratio of 1.19 versus the prior auction’s 1.65 bid-to-cover, and a yield of negative 42 basis points.
Also, the latest rise in the euro this morning is based in part on the hope that Five Star and Lega can still form a government after it emerged that they may look to avoid a new election entirely.
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