The easy victory of Giorgia Meloni, leader of the far-right Brothers of Italy, in Sunday’s Senate and Chamber of Deputies elections in Italy and the pound’s currency crisis shocked European markets on Monday.
While the Milan and London stock exchanges posted slight gains, the rest of the markets in Europe closed in the red and debt market interest rates rose significantly on Italian and UK debt.
According to Reuters, UK 10-year bond yields rose to 4.3%, a record since 2008 and the largest daily rise since 1957. 10-year yields rose nearly half a percentage point during the session. The pound, on the other hand, has been falling against the dollar for six consecutive sessions, has fallen 8% since late August and is approaching parity with the US currency. The spending liberalism of the new government of Liz Truss is deterring investors.
Pressure on UK markets eased somewhat after the Bank of England said it would not hesitate to raise rates further (which stands at 2.25%) if it “deems it necessary”, but the analysis of the issue referred to the next meeting – still far away – on November 3. The Chancellor of the Treasury also tried to reassure him by saying that he is faithful to the right bills and that he will present a medium-term budget plan on November 23 to reduce the debt burden. The negative reaction of the British currency and debt markets erupted after the Treasury announced on September 23 the biggest fiscal shock in 50 years and a 150 billion pounds (about 170 billion euros) aid package.
In the case of transalpine debt, the risk premium (spread) demanded by investors rose to 260 basis points, 2.6 percentage points of the cost of German debt. The future coalition government of the right, led by the far right for the first time since the fall of dictator Benito Mussolini in 1945, raises many uncertainties about ‘melonomics’. Despite Meloni’s promise of stability in public accounts, the axes of the economic program are a fixed load (flat tax) along with an infrastructure program and the promotion of Made in Italy along with the discouragement of moving.
The political turn in Italy and the UK currency crisis have been linked to what analysts are calling a ‘macro tsunami’, with major international organizations predicting the risk of an emergency landing or even a recession in 2023 on a global scale and in some economies. key – such as the United States and Germany.
Turning to the eurozone, Christine Lagarde said at a hearing in the European Parliament on Monday that continued contraction is expected in the last quarter of this year and into the first quarter of next year. In its 2023 projections, the European Central Bank (ECB) balances between moderate growth of 0.9% and a decline in GDP of 0.9%.
Lisbon among the European Union’s stock markets with the biggest declines
Despite the British currency crisis – the pound closed at $1.07 – the London Stock Exchange’s FTSE 100 index rose slightly by 0.03% on Monday. But last week it fell in three of the four sessions. In Milan, the MIB index closed 0.67%.
However, the rest of Europe ended in the red. According to data from Investing.com, the biggest declines were recorded in Budapest (-2.3%), Warsaw (-1.7% in the WIG 90 index) and Lisbon (the PSI fell by 1.3%). In Madrid the Ibex 35 lost almost 1% and in Frankfurt the DAX lost 0.5%. According to MSCI indices, the euro zone lost 0.8% on Monday.
Moscow led the world breaks with a dip of 8%. In Asia, red colored the most important stock markets: Seoul led the way with a decline of 3%. The Nikkei 225 index in Tokyo lost 2.7% and Shanghai – Asia’s largest city – lost 1.2%. The MSCI index for Asian markets fell 2.2%.
New York’s square, home to the two largest stock exchanges in the world, is in the red and the trajectory is set for a 1% drop next Monday. In Latin America, where markets are not yet closed, the situation is more serious than in Europe and Asia.
Italian spread shoots
Despite the fact that the Milan stock exchange held up, the Italian debt market experienced another turbulent period on Monday.
The 10-year secondary market rate is close to 4.7%, a nine-year high. O spread rose to 260 basis points, a record since the summer of 2013. This level of the risk premium is well above the red line of 200 basis points (a spread of 2 percentage points) drawn by the governor of the Bank of Italy during the speculative attack in June.
The premium demanded by investors in the case of Italian debt continued to rise even after Christine Lagarde assured MEPs this Monday that the European Central Bank will not push anyone out of the euro and will use it until all the tools at its disposal. have been exhausted ( depreciation reinvestments, the newly created TPI program and the already old OMT created by Mario Draghi in 2012) to stop speculative moves against debt.
On the secondary market, yields on other euro peripherals also rose on Monday, but the pressure was less. Yields on Portuguese 10-year government bonds rose from 3% at the end of last week to 3.17% at the end of the session this Monday. With regard to the last auction of 10-year bonds, the increase is already visible: on September 14, the Treasury paid 2.754% on the issuance of debt.
O spread On Monday, Portugal stood at 108 basis points (just over 1 percentage point), below the risk premia of the other peripheral euro countries: Slovakia, Slovenia, Spain, Malta, Lithuania, Latvia, Cyprus, Italy and Greece.
O spread Portuguese stood at 108 basis points (just over 1 percentage point), below the risk premia of the other peripheral euro countries: Slovakia, Slovenia, Spain, Malta, Lithuania, Latvia, Cyprus, Italy and Greece.
A clear symptom of the crisis risk perceived by investors: German and Italian 10-year bond yields closed higher than the cost of debt with other longer maturities. Yields on German 10-year bonds closed at 2.09%, while the 15-year bond stood at 2.03% and the 30-year bond at 1.95%. In the case of Italian debt, the 10-year yield closed at 4.69%, compared to 4.53% for 15 years and 4.2% for 30 years. This inversion is not seen in Portuguese debt.