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30/11/16
Europe
Renzi’s last gamble

The outcome of the Italian referendum is binary. If it’s a ‘yes’ vote the tide of populism throughout Europe would…

29/11/16
Europe
Target2 – rising risks to the euro?

It’s another reason to stay short Italian bonds. We also add a short position in Irish bonds. Ireland managed to…

14/11/16
Global
Trump l’Oeil

The reaction of financial markets to Trump’s election is explainable by expectations of tax cuts and rising fiscal spending. This…

Europe: Renzi’s last gamble

The outcome of the Italian referendum is binary. If it’s a ‘yes’ vote the tide of populism throughout Europe would recede as a threat. If the referendum is lost, it is unlikely we’ll just get business as usual under some rudderless coalition. Given what is happening in global bond markets, the unsustainability of Italian sovereign debt would be twinned with the ungovernability of Italy. The banking recaps would fail. Contagion would run from banks to the government and from there to the euro because Germany’s political calendar rules out any leniency. We are pessimistic.

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Europe: Target2 – rising risks to the euro?

It’s another reason to stay short Italian bonds. We also add a short position in Irish bonds. Ireland managed to escape the toxic ‘periphery’ tag through faster growth, but the tsunami of Brexit leaves the Irish miracle vulnerable again. Although only around 15% of total exports from Ireland now go to the UK, for exports from Irish owned firms (i.e. stripping out the effects of the international corporations, which have a high share of imports in their exports and thus a lesser impact on GDP) the total is closer to 35%. Due to Brexit these are already 15% more expensive in sterling terms. Growth risks do not correspond with bond yields of just 60bps over bunds.

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Global: Trump l’Oeil

The reaction of financial markets to Trump’s election is explainable by expectations of tax cuts and rising fiscal spending. This reflation trade equally pushes bond yields higher. Interest-rate expectations will ultimately follow. That doesn’t change the plethora of risks that come with a populist leader. But it does mean that equity markets can do well in the short term, while higher bond yields will also place a bid under the US dollar. It remains bad news for emerging markets, which now face the dual headwinds of fears of trade tariffs and a generally colder US alongside rising commodity (input) prices and strengthening greenback.

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