Monday, 30 September 2013

US debt ceiling crisis and Italy: the markets respond

The Weekend Is Over, US Futures Are Going Down, And Japan Is Getting Slammed

29 September, 2013

Well, it's finally happened.

The reality of the three government crises (budget and debt ceiling in the US, governmental collapse in Italy) is hitting home.

And markets are finally feeling it.

Over the weekend, the US Congress failed to agree on a budget, and the Italian government lurched towards collapse, as Berlusconi's party said it was withdrawing from the coalition.

US futures are sharply in the red with Dow futures off 100 points.

Here's a look at the Dow futures drop from FinViz:

Screen Shot 2013 09 29 at 7.43.00 PM
Meanwhile, Japan is really taking it on the chin.
The Nikkei is off nearly 2%.

Screen Shot 2013 09 29 at 8.25.07 PM
And dollar-yen is back below 98, as the yen surges thanks to its role as a safe-haven.
Screen Shot 2013 09 29 at 8.25.14 PM

For more on what's going on this weekend, see here.

CEO Of Italy's Largest Bank 

Surprisingly Resigns

29 September, 2013

The situation in Italy appears to be going from bad to worse. With a confidence vote pending for Tuesday as the government dissolves into chaos for the umpteenth time, and following the resignation of the CEO of one of Italy's largest non-financial corporations (Telecom Italia), the largest bank (by assets) in Italy - Intesa SanPaolo has announced - effective immediately - the resignation of its CEO and replacement with Carlo Messina. According to sources, the now former CEO had lost the confidence of shareholders (which is odd given the bank's stock is near 2-year highs). We can't help but wonder Ayn Rand-like at the devolution of the ruling class in Italy and what happens next (in light of the crumbling manufacturing and production data).

As we noted previously, things do not look so good for Italy (as a reminder the 3rd most indebted nation in the world)...

Italy’s Stability Program targets a 5%-6% primary budget surplus, and 3% nominal GDP growth. Both strike JPMorgan's Michael Cembalest as unrealistic in the context of post-crisis Italy. Italy ran a 6% surplus for a brief moment in the 1990’s but it didn’t last, as it was the result of a prior devaluation helping growth, some asset sales and some tax increases. Only asset sales seem feasible in Italy right now, if anything.
If Cembalest's concerns are correct, Italy will remain a country with almost twice the debt/GDP ratio as the US; unbreakable interdependency of the government, the banks, and the ECB; and low GDP and employment growth. If history is any guide, he will be right as the last few years have seen the biggest collapse in Italian GDP since The Unification in 1861...

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