It has been one of the more unnerving weeks in financial markets and judging by some of the questions from advisers and clients, the media was effective in using the commotions to sell copy through exaggeration. While new puns – Italexit, Parmageddon and QuItaly – were created to heighten the sense of drama, stock and bond markets made a roller coaster ride to end the week more rather than less were they had started. Contrary to the headlines, it was the risk-off rally in bond markets that was far more notable than what with hindsight looks more like another hiccup in stock markets.
Attributing all the blame for the week’s ructions at Italy’s (somewhat usual) drama of forming a government rather than sending voters back to the polls and that this revived fear of a Eurozone breakup seems rather unfair. We would agree with Ian Harnett of our research partners ASR, who noted “…not since the last Eurozone crisis, in 2010-11, has so much turmoil been blamed by so many on so few.” It is far more plausible that the constitutional frictions in Italy became the catalyst for another leg in what feels to many as an ‘incomplete correction” and began with the February stock market sell-off.
This latest episode can be seen as a manifestation of an increased sense of financial risk as Global liquidity tightens as a result of a gradual return of more ‘normal’ monetary policy, while at the same time the acceleration in Global economic growth is slowly fading back to a more durable, less exciting rate.
The rush back into fixed interest bonds has on the one hand brought bond valuations more in line with the lower growth expectations that had already been reflected in the reduced equity valuations, and on the other hand has lowered yields enough to ease much of the liquidity concerns that had of late entered the economic outlook ‘worry agenda’. The downward pressure on the highly valued €-Euro versus the US-$ which was also curtesy of Italy triggering the debt market re-ordering, will become welcome stimulus for the Eurozone’s exporters whose diminished price competitiveness from the strong €-Euro carried much of the blame for the sudden growth slowdown across Europe.
