Today's Italian event risks

John Hardy

Head of FX Strategy
John Hardy joined Saxo Bank in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

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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