When in Rome, Do Not Confirm the Finance Minister
Italy’s bond markets are unraveling in the wake of Italian President Sergio Mattarella’s refusal to confirm the new government coalition’s nominee for finance minister, Paolo Savona. Mattarella believed that confirming him would endanger the savings of Italians because Savona is not a fan of the Eurozone. The coalition’s plans for a universal income for all citizens while the country is €1.3 trillion in debt may have also endangered the savings of Italians had the government been confirmed, but that’s another matter. The heads of the coalition parties are quite angry about this and are calling for Mattarella’s impeachment for refusing the will of the people, as they say in democratic parlance.
The 5 Star Movement and the Northern League are also calling for new elections as soon as August, on the logic that maybe this time something different will happen. Meanwhile, Mattarella has appointed former IMF senior official Carlo Cottarelli as caretaker Prime Minister while Italian interest rates explode higher in uncertainy. Rates on 2Y government bonds have skyrocketed 109 basis points in three weeks, from a yield of -0.2% to a current yield of 0.89%. That means the Italian government, which previously was paid 0.2% interest to do nothing but borrow money for two years, will now pay 0.89% in order to do the same. In other words, debt is headed up, as always. Just faster now.
What to do: Get out of Italian, Spanish, and Portuguese stocks and bonds. Contagion may spread quickly from here to the weaker Eurozone countries. (NYSEARCA:EWI) (NYSEARCA:PGAL) (NYSEARCA:EWP)
Futures Down With Oil, Dollar Up, Gold Steady
US Futures don’t like what’s happening in Italy either. The S&P 500 (^GSPC) is set to open down 9 points as of now, or 0.33%. Dow Futures (^DJI) are also down the same amount, together with oil (NYSEARCA:USO) whose fall is continuing today on the back of news out of Saudi Arabia that the OPEC leader may increase production and that Russia is happy with oil at $60. With the dollar (NYSEARCA:UUP) up on Italian news battering the euro, gold (NYSEARCA:GLD) is also down below $1,300 on the back of dollar strength.
What to do: A correction was overdue in the oil markets since the price advance has been exceptionally strong on Brent crude’s trip to $80. Saudi Arabia will has a vested interest in a high oil price, Iran is still being sanctioned, and Venezuelan oil production is not coming back online any time soon. The dollar may continue to show strength as the euro deteriorates into another round of debt crises.
Cryptos Keep Falling Farther with Bitcoin Testing $7,000
In what appears to be a stepladder formation, bitcoin (BTC-USD) keeps trading farther down by the day in an orderly decline now testing $7,000. Cryptocurrencies have been down every day for the past 8 days straight and are nearing support post December top. While it looks as of now that support will likely be reached, the question is what happens at that level. If it breaks and stop loss order are triggered, then the bottom could be a lot farther down. The Justice Department’s announcement looking into bitcoin spoofing (fake orders to move price) and wash-trading (trading with oneself to give the impression of price movements in a certain direction) hasn’t helped the situation.
What to do: Catching a falling knife here could be dangerous. Best to let others handle this one.
Has Subprime Auto Lending Finally Caught Up to the Automobile Industry?
Nissan (OTCMKTS:NSANY) has announced a 20% cut in vehicle production for the North American market. The fact that auto loan delinquency rates are higher now than during the financial crisis, and this during boom times, certainly speaks caution and may be why Nissan is cutting back now. US sales have dived 6.5% so far in 2018, and if the auto loan market has more deteriorating to do, those figures could continue falling not just for Nissan, but for other domestic US car manufacturers as well.
What to do: Monitor Ford (NYSE:F) and General Motors (NYSE:GM) to see if they will also be paring back production to sustain profitability.
Fed’s Bullard Thinks We Hit That Magic Neutral Interest Rate Nobody Can Ever Find
According to many people at the Federal Reserve, there is something called a neutral rate of interest that does not encourage nor discourage economic activity. Yet, is there really a neutral price for anything? Prices change all the time in response to market conditions without a central committee trying to find any right price for any specific time. Yet, the Fed’s James Bullard believes we may be at that point with interest rates, and therefore cautions against raising rates any further unless economic data and inflation come in stronger than expected. In other words, as always, the Fed is data-dependent. Personal Consumption Expenditures inflation numbers from the Fed’s “preferred measure of inflation” are due at the end of the week.