Commenting on today's sheer market chaos as the US and UK return from holiday, Bloomberg writes that "fixed-income markets have descended into panic amid mounting concern over the risk of Italy leaving the euro or leading to its break-up" and while Italy is suffering the biggest losses in peripheral debt, core bonds and Treasuries are spiking higher.
For those who stayed away from market news over the holiday weekend, this is what happened and why we are here today: Italy PM-designate Conte gave up on efforts of forming a government after Italian President Mattarella rejected Eurosceptic Paolo Savona for the Economy Minister position because the appointment would have “alarmed markets and investors, Italians and foreigners" (yes, very ironic in retrospect, although just as we predicted would happen).
Mattarella then summoned former-IMF senior director Cottarelli to meet in a move viewed by some as laying the groundwork for a technocratic government. Forza Italia said they would not support this government, and 5SM and League set their sights on the now highly likely new elections (touted from September 9th). Both 5SM and League saying they will evaluate their coalition in these new elections.
But what is different this time, is that while the risk-off sentiment is spreading across risk assets around the world, with Italy and Spain leading declines in European stocks and U.S. equity-index futures also sliding amid soaring contagion fears, with the euro also slammed below 1.16 pushing the yen and USD higher along with gold, it is unclear just what the ECB can do this time, which back in 2012 unleashed the threat of "whatever it takes" to halt the last Italian collapse.
Well this time, "whetever it takes" has been running non stop since July 2012, and the ECB is rapidly running out of bonds to monetize, so it may well be that we are finally approaching the end of the European experiment, unless of course Draghi gets a greenlight from Merkel to start monetizing everything - stocks, bonds, and anything else that is not nailed down - in hopes of stabilizing markets.
And before it is all over, he will, just as Europe will file criminal charges against those who dare to short Italian bonds. For now, however, as we showed earlier, Italian bonds are crashing with 2Y yields plunging the most on record, Italian-German spreads exploding, Deutsche Bank stock tumbling below €10 for the first time since September 2016, and Italian bank CDS blowing out.
Panic, Crisis In Italy: Dealers Pull Bids As Bonds, Stocks Crash; Euro, Deutsche Bank Tumble As Contagion Spreads
With UK traders returning from vacation, Italy woke up to a sheer selling panic as yesterday's "modest" selloff mutated into a full-blown liquidation avalanche, lead by a furious repricing of the BTP curve, where 2Y yields exploded another 170 bps higher on the day rising to 2.60% from negative just a few days ago...