by Alexsandar Adamovic

The Italian saga continues, resulting in markets trading down and we are seeing several of the “real” risk indicators starting to move. If the Italian situation really starts gripping investors minds, we should start seeing bid for safe havens, ie we should see the EUR CHF start moving. This is actually happening today. Below is the EUR CHF intraday chart.

Rhetorics are getting more intense. We heard Junker compare Italy to Greece, sending jitters in the FX markets. At the same time, Italian head of the lower house budget committee, Mr Borghi, says:  

  • “There is not plan to leave the euro within this government regardless of my personal conviction,”
  • Our deficit is “not a revolutionary move”, France is doing worse and “we are still more cautious than France”
  • “There is a lot of potential for the Italian economy if only we could push a little growth with some incentives from the government”
  • “We are not crazy, we are not Venezuela”

Euro Stoxx 50 fear index, V2X volatility, is spiking higher by 10%. Below is a chart showing the V2X index (orange) versus the Euro Stoxx 50 index (white). Note that  last time we saw volatility trade at these levels, the Euro Stoxx 50 traded almost 2% lower. Something would need to give in.

The Italian MIB is sitting on huge levels. Price action is horrible. A break below the support levels and this risks getting nasty. For now, early September low levels are key support to watch.

Everybody talks about the Italian 10 year yield. It is currently pushing the May Italexit highs. 3.5% is a psychologically huge level to watch. The spread versus German yield is surpassing the 300 bps level.

One thing to note, back in May investors spoke about Italexit, now they are arguing about a few decimals on the budget, but still the 10 year trades at the same levels as last seen in May. Something just doesn’t feel right.

The Italian Banks have been the hardest hit. During the May turmoil, this index fell 22% in a few weeks. This time the index is down 15% in a few days.

The Italian situation is spreading to the Euro. We are seeing the Euro take new lows on the day, trading at levels last seen in mid August. 1.15  is a very big level to watch.

With the Italian situation is starting to spread to other risk assets such as several FX pairs, CDSs and volatilities, this local budget  saga is starting to feel like it could have a more global feel to it. If this starts becoming more global, the number one fear index, the VIX, will most probable revive from current sleepy mode. If nothing we have earnings coming up soon. Could VIX be a cheap global hedge at these levels?

Source: charts by Bloomberg