Italian FTSE MIB reverses gains as EU triggers EDP against Italy

Summary:

• Italian equities reverse previous gains and bounce back from crucial resistance
• EU triggers excessive debt procedure against Italy due to large debt level
• Italy/Germany 10Y yield spread jumps on the news

The European Union decided to trigger a so-called excessive debt procedure against Italy due to a high level of indebtedness. This is the first time the EU has launched such a procedure against an EU member. The European Commission expects the Italian debt-to-GDP ratio to rise in both 2019 and 2020 to over 135% on the back of a debt-increasing “snowball” effect, a declining primary surplus and adverse demographic trends. These factors are expected to partly reverse the positive effects of past pension reforms and, as a result, weaken the country’s long-term fiscal sustainability. The EC also said that “low productivity growth keeps constraining Italy's growth potential and hampering a faster reduction of the public debt-to-GDP ratio.”

In response to the decision the Italy/Germany 10Y yield spread has jumped several basis points and it is trading at 2.82% at the time of writing. The euro has barely reacted while the Italian FTSE MIB (ITA40) has begun reversing its previous gains. It is worth noting that the index is bouncing off the crucial technical supply zone. The more notable support can be localized nearby 19600 points, the level is also supported by the 50% of the latest upward move.

The FTSE MIB is reversing after the EU has launched the excessive debt procedure against Italy. Source: xStation5