Btp/Bund spread tested by budget law

7 September 2018

We have arrived at the end of the summer and the Italian market has begun to incorporate in stock prices the tensions related to the submission of the budget law, which will be the predominant issue in the coming weeks.

The budget law is an important test for its possible repercussions on the Bund/BTP spread and, consequently, the stock market. We must consider that some of these tensions are already implied in the current prices on the Italian market.

The sector most heavily penalised was the financial sector, in particular, banks. Quarterly results presented high and lows. While credit quality showed constant improvement, the issues arise from the trend in commissions and the absorption of capital due to the widening of the spread. The uncertainty in recent weeks has also involved the world of regulated assets, as a result of discussions following the tragedy of the Morandi bridge in Genoa.

Other internal factors must also include the difficulties of emerging markets, which in some cases are overwhelmed by currency crises. In this scenario, it was difficult to find foreign cash flows entering the Italian market, in particular those with a long-term objective that make visibility a condition for investment. The few large inflows were mainly motivated by trading opportunities created with the drops in prices.

We believe that in the coming weeks we will continue to see high volatility, but unlike the past few months, we believe that this volatility can generate satisfactory medium-term buying opportunities. In fact, these opportunities are due both to the absolute level of prices and the greater visibility that we should have after approval of the budget law.

By Massimo Trabattoni, Head of Italian Equities at Kairos, for the “Italian Times” column of AdvisorPrivate.