Italian equities underperform as politicians step in

Summary:

• Italian equities are underperforming against other European peers

• Di Maio threatens to block EU budget decision

• Tria denies going to China to attract bond buying

The European equities are trading higher all across the continent with only one country being exception - Italy. The Italian companies are underperforming today and in turn the FTSE MIB (ITA40) is the sole blue chips index from the region to trade below Friday’s close. The country received increased attention on Monday on the back of two speeches.

ITA40 (FTSE MIB futures underlying) pushed significantly lower after painting double top in late-May. The benchmark pulled back to the 200-week moving average and bounced from there. However, beginning of this week’s trading does not bode well for the recovery extending over subsequent weeks. Source: xStation5

Firstly, let’s mention the remarks expressed on Sunday by the Five Star Movement leader (M5S), Luigi Di Maio. In the previous week we wrote about comments from Di Maio suggesting that Italy may drop its financial contribution to the EU budget in case the bloc authorities fail to reach a deal that would solve or at least make Italy’s problems with illegal migration less severe. The meeting took place in Brussels on 24th of August and did not produce any kind of agreement that would suit Di Maio and Italian government as a whole. In turn the M5S leader published a video on Facebook in which he said that “we will look at all measures in discussions regarding the European budget and will block what doesn’t work for us”. The politician continued saying that “the other countries are not doing what’s not convenient for them”. This was of course a reference to the fact the other EU member states keep evading taking a part of the migrants arriving at the Mediterranean coast and as a result countries, like for example Italy have to deal with this burden on their own.

Taking a look at the ITA40 chart on the H4 interval we can see that the benchmark opened today a notch below the 33-period moving average and immediately rushed lower. The sell-off has been halted around 20550 pts handle for now. Source: xStation5

Having said that, what could possibly happen to the European Union budget in the aftermath of this developments? Not much to be honest. As the EU budget needs an enhanced majority of votes to be passed, Italy alone cannot block it. However, Italy could drop current contribution to the budget. In such case, a breach of the European law would occur and the EU could consider taking legal action against Italy.

Secondly, it is not a secret that Italy has some problems with its own budget. Because of that the trip that the country’s Finance Minister Giovanni Tria will make to China was viewed as an opportunity to acquire interest in the government bonds. However, this hope was buried today as Tria himself denied that the goal of his visit is to find buyers for domestic debt instruments. In case the Italian government find it harder to attract interest for its bonds the outlook for the heavily indebted country may worsen further.

While Di Maio vowed to block EU budget decisions markets do not see such threats as worrying in the context of the whole European economy. After a brief decline in the morning hours EURUSD is continuing to march higher eyeing a repeated test of the 1.1650 handle. Source: xStation5