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Conte

27 August 2019 by jbchevrel

The continuation of Giuseppe Conte as Italian PM seemed a problem for some in the center-left PD, as did the 2020 budget, as part of the negotiations to form a new government. This morning, risk had softened with reports of the cancelled PD/5SM meeting. However, this afternoon, the senate chief of PD said that progress had been made on the government deal with Five Stars. Subsequently, reports citing officials hit the wires, stating that the Democrats have agreed to have Conte as PM, which was a red line from 5SM and a cornerstone in the discussions. Beyond that, the Democrats said they wanted to limit Di Maio’s role in the government. The market’s expectation seems that under a PD-5SM coalition government, the EU budget deficit limit of 3% of GDP will not be breached, most likely. Across assets, the Italian risk enjoyed a strong session this Tuesday. 10y BTPs rallied -19bp, tightening -16bp vs 10y Bunds. In equities, the FTSE MIB index rose +1.5%. And in our space, the sovereign 5y doc 14 USD CDS tightened -12bp, back to levels last seen at the beginning of this month. In iTraxx space, Snr/Main tightened -1bp to +9.5bp, reflecting the fact that in euro financial CDS space, the Italian financial names rallied aggressively (bacred/assgen/ucgim -6 ispim -5). The rally occurred with close to no compression move (SUB banks -14/-10 assgen SUB -8), which was in line with the broader financial indices. Indeed, Sub/Snr very stable close around +10.5bp. In stocks space, the four constituents of financial iTraxx closed +1/+1.5%, outpacing the sectorial benchmarks (SX7E ~flat SXIE ~flat). That said, the difficulties met by PD/5SM give a sign of how stable such a coalition would be, if it is built.