Upcoming Italian election could put pressure on assets
Political uncertainty in Italy may produce opportunities for market bargain hunters; and four other big themes likely to dominate thinking of investors and traders in the coming week
1. Five months of Italian political noise
When investors return to their desks this week they will have to deal with the fact that Italy’s long countdown to a new national election has officially started.
The vote is due on March 4 but it is expected to produce a hung parliament. A new government is therefore unlikely to be formed before May at the earliest meaning there will be five months of political noise in the euro zone’s third-largest economy. Unsurprisingly Italian yields have risen.
The anti-establishment 5-Star Movement currently leads opinion polls but other parties are reluctant to join forces so analysts sense that the result could be a centre-right alliance around 81-year-old and four-times premier Silvio Berlusconi’s Forza Italia (Go Italy!) party. He cannot become prime minister, however, due to a tax fraud conviction.
So, it could all put pressure on Italian assets as 2018 starts, scaring some investors away but creating opportunities for others hunting for stock bargains as the economy improves.
The Italian stock exchange is set to end 2017 as the best performer among major European markets but under certain metrics it remains undervalued. The MSCI Italy index is trading below its 20-year average on price/earnings basis, while the pan-European STOXX is trading above.
The European Central Bank is going to take a big step towards the withdrawal of stimulus in January, halving its bond buying scheme from 60 billion euros a month to 30 billion. Yet the market up to now has barely flickered in the run up to this; German 10-year bond yields, for example, are only 3 basis points or so higher than when the announcement was made.
There could be many explanations and rationalizations for this – among them that the ECB is going to keep the program going for longer than expected – but the reality may simply be that euro zone bond markets are no longer scared of the dreaded T-word, tapering.
There was a bit of a sell-off though relative to US Treasuries at the start of 2017 when purchases went down from 80 billion to 60 billion euros a month so maybe investors might be watching out for another January sale.
3. Commodity oddities
A sharp fall in Aussie dollar long positions speaks to the ongoing debate about how this and other hot-running commodity currencies will fare in 2018.
The Aussie dollar, Chile’s peso and South Africa’s rand have all notched up gains of 8-11% versus the US dollar in 2017 helped by a belief that improving global growth will boost demand for their main resources – copper, iron ore and other metals.
Yet the yield pick-up that the Aussie for example is famed for is close to disappearing – the premium offered by Australian two-year bonds over their US counterpart is already down to almost nothing and looks set to turn negative for the first time since 2000. Emerging market dollar-debt spreads are also at their slimmest since 2014.
So so far it looks like the commodity upswing, which has more legs according to analysts, might be the driver of these currencies even if the declining yield spreads begins to apply the brakes to their gains.
Bitcoin is on track for its worst fortnight in almost four years from a record high of almost $20,000 all the way down to $14,000 where at least it seems to have stabilised for now.
One of the worries is that moves to regulate the opaque, high-risk market are gaining momentum. South Korea said on Thursday it will impose additional measures while Israel’s top markets watchdog has said he wants to ban companies based on Bitcoin and other digital currencies from trading on the Tel Aviv Stock Exchange.
Some leading cryptocurrency exchanges have also been struggling with frequent outages and online attacks that have crippled their services and left investors worried including hedge fund star Mike Novogratz who has shelved his plans to launch a crypto-fund.
So after an eye-watering 14,000% price surge in 2017, is this the beginning of the end for Bitcoin whose crypto-rivals also now number more than 1,000, or is this just a consolidation period before the next price surge?
5. Spiking the punch?
With a new US tax reduction plan signed and sealed and permanent tax cuts in place for corporations, the question now is whether managers will use the extra cash to hire more workers and fulfil the campaign promises of President Donald Trump to create jobs.
The US economy is already chugging along at a healthy clip with an unemployment rate at a 17-year low of 4.1%. The December read on US unemployment may be too soon for jobs data to show any tax-cut inspired hirings but it will be closely watched for a broader health check nevertheless.
The latest Reuters poll, for the report due on Jan. 5, has the rate holding steady at 4.1%. The ‘U-6’ rate, which measures both discouraged workers who stopped looking for a job and part-time workers looking for permanent employment, is hovering at its lowest point in 11 years.