Why does everyone care about Italy?

Well there’s this…4th largest debt load in the world

via visualecon
and then, there’s this…GDP in the entire Eurozone is only projected at .5% next year. Italy is trending even lower.

and then, there’s this…which is what happens when you try to solve a debt crisis via austerity


via reuters

 

 

 

 

 

 

 

 
 
 
 
 
and then, of course there’s this…Italian financing costs, which have come down in the last few days after hitting record levels. We suspect the most recent drop in yields was certainly due to ECB intervention. We would expect them to be under constant pressure as banks around the globe slash exposure.

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Why have US equities ignored Italy/Europe the past month?

In response to this article at pragcap, which is a great site by the way…http://pragcap.com/the-stocks-vs-italian-yields-conundrum#comments

“There’s 1 of 2 things going on here in my opinion;  1)  The equity market is over the Euro crisis and is certain that the EMU governments will fix this disaster.  Or 2) There is now a disconnect between reality and perception.”

Those two points are completely valid but we think the easy explanation is as follows…

Markets were expecting a dismal Q3 earnings and jobs picture and many had baked in an accelerating US recession. We then got one decent report after another in October (payrolls, GDP, etc). Were they good? no. Did they stave off recession fears, yes (for atleast another quarter). And this is why US equity markets de-coupled from the Euro-calypse. Will it last? Not if Italy (which no one really cared much about 2 months ago) goes up in smoke. As we’ve said, be prepared for more volatility.  If you extrapolate the Greek fiasco to Italy, we would expect headlines to dominate trading.  One minute euphoria, the next the world will be ending. Don’t get married in either direction. We would certainly err to the downside especially if you see any negative US economic data come out.

Italian 10yr yields soaring today…only eclipsed by the 2s and 5s, as the curve has now inverted.