Eq: Dev ex-US
Several days ago we made call, saying that it seemed likely the EU would have to go against its own rules and use public funds to bailout Italy’s Monte dei Paschi and other troubled Italian lenders. That call appears to be starting to come true, as ECB chief Mario Draghi has now officially called for a public bailout given “exceptional circumstances”. Draghi said doing so would help avoid firesales. So far, Italy has been unsuccessful in trying to secure funding to save its banks, and it has thus far been unwilling to impose losses on private investors, as doing so would inflict harm on a great many Italian households.
FINSUM: We think the EU is going to be forced to come around on this. The reason why is that if they let Italian bondholders take the big losses, then the far-right party is going to steam roll through a referendum on Italian Euro membership on the back of popular anger, which would torpedo the currency and launch a new financial crisis.
Source: Financial Times
There is big trouble brewing in Italy. With so many important headlines swarming media outlets recently, it would have been easy to miss the potential banking-induced socio-political crisis brewing in Italy. Italy’s banks, as everyone knows, are in big trouble, and Monte dei Paschi is chief among them. The bank badly needs to raise capital to stay afloat, but experts say it will be virtually impossible to do so in private markets, which means a bailout may be necessary. However, new EU banking regulations dictate that a bank cannot be bailed out with public funds unless private investors have been wiped out first. Unsurprisingly, Italy is loath to let that happen considering ~$2.5 of the bank’s junior bonds are held by Italian households. Italy is working furiously to find a loophole in the regulations.
FINSUM: Just imagine how badly this could go. Italians are already livid about the state of their economy and largely blame the Euro. Now think what it could do if the EU tries to force a wipeout on Italian creditors. This could be the moment when tensions come to a boil.
Source: Wall Street Journal
We have not written much about Brexit over the last week or so, but we thought it might be time for a worthwhile update because of the event’s implications on the future of the Euro, and thus financial markets. Theresa May is now the UK’s new PM and she wasted no time in appointing a surprise cabinet, including big pro-Brexit campaigner Boris Johnson as her foreign secretary. Additionally, another hardline Brexiter David Davis will oversee the departure negotiations with the EU under the title of “Secretary of State for Exiting the European Union”. The article says Davis’ view on Britain’s Brexit plan and potential is woefully optimistic. It should be noted that Theresa May herself was a mild Remain supporter.
FINSUM: This preposterous cabinet makes it seem like the negotiations with the EU are going to progress very badly. We think the EU will be combative given the team assembled, and this could actually work against the bloc as it may infuriate some countries which are on the brink, like Italy.
Source: Financial Times
There has been a lot of bearishness about the future of Europe lately. Many investors are worried about the potential collapse of the Euro following the UK’s Brexit. However, this piece says that European stocks may just be too good of a deal to pass up. The article is based on a valuation metric that JP Morgan uses for measuring stocks. JP Morgan Asset Management’s argument is that the MSCI Europe ex-UK Index and the FTSE All-Share Index look cheap on a ten-year inflation adjusted basis, with ratios below their long-term averages. The head of European equity strategy at the firm says that “we can see nothing that suggests the referendum result will rock European confidence and growth particularly”, which would boost earnings for European companies and presumably help stocks.
FINSUM: We think this a very narrow view of the situation. Italy, Austria, and Hungary all already have major votes ahead that could hurt the EU and Euro. In our view, fundamental earnings-based investments should be an after thought until those hurdles are cleared.
Mainstream media seems to be coming around to FINSUM’s view on Europe—that the continent appears at a very high risk of political and economic collapse. With that in mind, this piece highlights what might be the next domino to fall—Austria. While this quiet alpine country gets relatively little attention, the nation’s highest court has just annulled the results of its most recent, and very tight, presidential race. The annulment means the right-wing populist candidate will have another chance at securing victory. If that happens, the path to a Euro referendum seems quite likely. The development follows the far-right anti-Euro party’s mayoral victory in Rome recently. Italy is another potential Euro-leaver.
FINSUM: This story is just political speculation at this point, but both Austria and Italy have been cited as leave threats and the developments in those countries seem to be moving towards that eventuality.
In a shocking move today, former London Mayor Boris Johnson, who was the frontrunner to become the next Prime Minister of the UK has announced he will not run for the job. Johnson was the lead figure in the victorious “Leave” campaign in Britain so he seemed to have inherited all the glory, but oddly, has now deflected it, choosing to stay on the sidelines in the new race to be PM. Several other Tory party candidates are grappling for the leadership role.
FINSUM: So Britain’s most dominant Leave figure, who likely would have led the country because of the big political victory, has decided to bow out? This might signal that Brexit is headed nowhere.
Source: Wall Street Journal