Brexit woes are still disturbing investors not only in the UK, but all over Europe. The future of the European Union without the United Kingdom is still ambiguous but then again this is direr for the U.K and the London property market is a clear evidence of this.
Setting the Scene
The EU not only needs to stop worrying about the UK, as it is a self-inflicted injury. The current situation over in Italy represents a much larger alarm situation for the EU.
The Five Star Movement party over in Italy was the last thing that investors wanted to see taking any control of power. But, that is all in the rear mirror now, the new government has shaped up with one of the weirdest collations in the history. Giuseppe Conte, the next prime minister of Italy would have difficult task on this hand. He has run a government which consists of two populist parties and this could change Rome’s relationship with Europe. Welcome to a strong possibility of Italexit.
This coalition could sabotage the EU’s aim because both collation partners are poles apart in terms of their views. One element which both the left-populist Five Star Movement and right populist League hold in common is anti-immigration. A free movement of labour and keeping the borders open to immigrants is the cornerstone of the European Union.
Investors Keeping Close Eye on Italy
For investors, Italy has been daunting choice of investment because of the banking situation and the country’s trade balance situation. It has mammoth amount of debt and little to no commitment to reduce that any time soon. To make matters worse, the upcoming government has plans to put this equation further out of whack. The left side wants to implement high-spending policies while the right side wants to lower the tax burdens. A great recipe for growth but not so great to deal with the country’s debt.
But, who cares about the current debt which is standing at 130 percent of gross domestic product!
If any country cannot be bullied and can laugh at the EU polices, it got to be Italy given that the EU rules and guidelines are all about the country’s current debt and GDP.
The new coalition government wants the EU to re-kindle its bank reform as well as the single market for goods and services within the EU. If things are not going to go their way, the threat of leaving the EU would be right on the door step and this makes the situation even more dangerous. Italy is firmly embedded in the EU so leaving the union would not be an option which the EU could afford.
The Trade
Investors are going to keep a close eye on this in the coming weeks with the Italian markets looking a lot feebler in relative perspective.
A trade which could make sense for investors would be going long on the DAX index and shorting the FTSE MIB as the situation becomes worse. Similarly, we expect the borrowing cost for Italian debt to move higher as well and the 10-year German government bond yields could drop.
At the same time, I also expect the situation to impact the eurozone’s currency adversely as well. Hence the possible trade could be going long on the dollar index while shorting the Euro. Naturally, any weakness in the Euro would push the DAX higher.
