Global Weekly: Italian politics stir markets

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Italian politics sparked market turbulence this week. After President Mattarella vetoed on the appointment of euro-sceptical Paolo Savona as minister of finance, markets were in disarray. Later, parties have proposed a new minister of finance and a new government can be established.

Italian bonds reacted strongly to these developments, as investors feared a revival of the discussion about the future of the euro and a potential write-off on Italian bonds. Italian 10-year yields rose above 3% on Tuesday. The fear was that Italian banks would tumble over, as they hold large portions of Italian government debt. This caused default risk premia for most corporate bonds to increase, and prices to fall.

Over the last few days, markets have quietened down somewhat, and the Italian 10-year bond yield now fluctuates around 2.6%. We, however, expect volatility in these parts of the bond market to persist, until there is more clarity on the impact of Italy's political woes.

During all the turbulence, we also saw a first glimpse of eurozone inflation rising towards 2% in May. This is mostly related to energy prices, but also core inflation. On the core inflation front, however, we do not expect these effects to pull through. We expect core inflation to more or less remain at current levels for the next few months. Although the political  developments in Italy have completely overtaken  the price development of German and Dutch government bonds, part of the recent rise in yields should also come from this inflation development.

What happened, Deutsche Bank?

Most stock markets around the world declined this week with particular weakness in Europe, caused by Italian politics and the newest US move in steel and aluminium tariffs. Deutsche Bank shares dropped to historically low levels.

Stocks in Europe were hit by political uncertainty in Italy, as plans to form a government fell apart. Moreover, markets were nerved by the fact that the US announced that it will not extend the exemptions on steel and aluminium tariffs for the European Union. Trump is also said to be considering tariffs on car imports, which could hurt European players.

There was quite a lot of news in the automotive sector this week. First of all, SoftBank announced that it will invest USD 2.3 billion in General Motor’s autonomous vehicle unit GM Cruise. Investors were excited by the news and pushed the General Motors shares up by more than 10%. Tesla’s news flow was less favourable this week, as a Tesla Model S in autopilot mode drove into a police car in California. A couple of days later, an unmanned Tesla spontaneously started riding in Brussels hitting five other cars before coming to a stop.

Another noteworthy event, was the fact that the share price of Deutsche Bank dropped below EUR 10 for the first time in more than 30 years. This means that the once mighty German bank now is only the number-12 European bank in terms of market capitalisation. The shares dropped as press reports suggested that the bank was put on the list of problem banks by the US Federal Reserve. Deutsche Bank reacted by saying that its US subsidiary has a very robust balance sheet.