As everything changes everything stays the same

Will Italy start to add a few bricks to the current wall of worry? The March elections had failed to find a clear winner capable of forming a coalition government going forward. As is often the case in Italy this has left something of a political vacuum. In the past few days, there has become the possibility that the Five-star party and the far-right League may form a coalition. The Five-star party are a populist anti-establishment group who, more importantly, are eurosceptic and commanded the largest share of the vote at the recent elections.

Italian bonds and equities have sold off this week on political concerns, but there was little in the way of contagion into the rest of the European, bond and currency markets. The coalition denies they wish to leave the euro but have requested that the ECB write of 250bn euros of Italian debt, something they are unlikely to do. 

There does seem to be suggestions, as was the case when Greece was under the cosh, that Italy could re-introduce the lira and run a dual currency alongside the euro. If this view was to gain traction, then one would expect further contagion into the rest of European assets. 

Equity markets around the globe have recovered their poise in the past weeks. The Global Dow Index, at one point earlier in the year, was up circa 7%, then had a quick 10% correction, and with a modest recovery to be flat on the year. So far this year, domestic US equity investors would have benefited from a small rise in equity indexes, however, they would have lost circa 4% in US treasuries. US Large-cap growth has outperformed US large cap value by around 10%. US small and large-cap stocks have performed roughly in line. US tech has been the best performing sector, consumer defensives the worst. The FTSE 100 has modestly outperformed the FTSE 250 by a couple of pct. Long only commodity index is up 6%, possibly mainly driven by the oil price. The price of gold is little changed on the year. The Stoxx 50 is roughly where it started the year. With all the early volatility one could have expected long-short hedge funds to do well, however, according to Barclays Hedge, as of the end of April, they were mostly flat for the year. If you went to visit the desert island at the start of the year, with the exception of the oil price, and some sector movements, most everything else would suggest this has been a very dull start to the year. 

Posted on May 17, 2018 .