Europe

Following on from our recent comment on the level of Italian BTPs and how this has a potential to impact the transmission mechanism, it is interesting to note the subtle but important changes that have been applied elsewhere across the global economy.

After the most hectic week of the year to date, relative calm has at least temporarily been restored to markets.

Clearly the decision by Italian President, Sergio Mattarella, to refuse the appointment of Paolo Savona as the coalition’s Finance Minister, on the grounds of him being overtly eurosceptic, has backfired badly.

We are currently of the view that the market panic generated by the plan published by the new Italian government is a bit excessive.

Following on from Gary’s recent blog Credit Still Being Cycled, this week the ECB released their quarterly Euro Area Bank Lending Survey for the first quarter of 2018, and it paints a slightly different picture to the Bank of England’s report in one area in particular.

When valuations in fixed income are this stretched, we must be on the lookout for overbought assets to avoid, and unloved assets offering a rare opportunity to pick up yield.

Fixed income managers always want to have the flexibility to find the best value across their investment sphere and therefore need the capacity to buy bonds in different currencies.

Ballots are still being counted in this weekend’s Italian election but the picture is becoming clear, with two parties emerging stronger from the ashes of a bitter electoral campaign: 5 Star have estimated to have polled 32% and the far right Lega (a.k.a. Northern League) have 18%, but no one coaltion can claim a victory.

Last Friday saw the publication of the last electoral poll before the Italian elections that will be held on the 4th of March.

Our base case for rates markets is a gradual shift higher, but there are reasons to consider why even our forecast is too constructive and the move higher could be more substantial.