Independent Strategy

Italy – boiling the frog

The Italian economy is similar to the proverbial frog in the slowly warming pan of water. The frog knows it is getting hotter, but by the time it wants to react it finds it has already been cooked. Traditional macro or credit analysis would tell you the gas is turned on, but with the ECB expected to launch a sovereign QE programme next year the process has been extended. Ultimately, the debt sustainability issue should translate into wider credit spreads (faster cooking), but Italian bonds (BTPs) are not trading as a macro asset. Nevertheless, short BTPs look reasonable as a hedge to short euro positions versus the US dollar.

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