– Italian uncertainty weighs on EUR, but low investor positioning may limit the fallout
The Italian post-election uncertainty continues to weigh on market sentiment. Italian 10y bond yields traded near 4.9% (from 4.3% before the elections), Italian equities fell by 4.9% and the EUR has been trading around 1.3050. The latest comments from politicians suggest that while a Bersani-Berlusconi grand-coalition is possible, its stability and commitment to reform would be questionable since the vote clearly pointed to austerity fatigue. In any event, concrete coalition talks are unlikely until mid-March, which implies that uncertainty will stretch into the coming weeks. In the near term, EURUSD will take its cue from peripheral stress indicators (Italy-Germany 10Y) which have now widened to levels seen in late-December, when spot was just above 1.3000. It seems likely that the stop of 1.2980 on our long EURUSD recommendation (from 1.3180 established last week) is at risk. However, we do not believe this is the start of the next round of a Europe- side debt crisis,given that Italy’s overall fiscal position is relatively stable and that investors do not appear to be overweight European assets, which should limit the impact of any unwind. Today’s Italian 10y and 5y bond auction is likely to be a key test of sentiment and while our fixed income strategists believe they are likely to attract sufficient demand, Italian bond yields should still be vulnerable to further upside above 5%.
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BNP Paribas