According to the firm's head of European rates strategy, Ciaran O'Hagan
- New government is still seen to be dangerous for long BTP positions
- There is possibility of more forced selling
- As well as ratings downgrades and capital outflows
- Recommends using rebound to establish new shorts in Italian bonds
- New coalition government takes market back to same situation last week
- Populist parties have started their intention to keep the euro
- But unclear how fast measures will be discussed on euro incompatibility
- Strong chance of early downgrade from Moody's, probably within weeks
- Too early to expect capital outflows this summer
O'Hagan also notes that when the capital outflows do happen, it could be a prelude to capital controls and further ratings action. That's something to consider moving forward. As I mentioned yesterday, a less euroskeptic government may not be seen as negative now but a fiscally irresponsible government will still come back and haunt the euro in the bigger picture.
He also adds that at the moment the bid/offer spreads on BTP futures are "stunningly wide". That's not too surprising given the volatility we have seen this week.
