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Italy and Dallas - May 29, 2018

With the recent violent movements in Italian bonds, it’s hardly surprising that market commentary seems to have become highly divergent. So we either face imminent financial Armageddon or all we have to do is wait for a few well-placed words from Mario Draghi to present yet another buying opportunity. However, while the punditry is running around like headless chickens, we like to keep it simple and ask; ‘cui bono?’, or perhaps ’cui malo?’ i.e. who or what is most exposed to Italian bonds.

As we wrote in TFTD on April 3,

“despite the ECB buying boat loads of BTPs, Italian banks are still massive owners of sovereign Italian debt. Perhaps even more remarkably the exposure isn’t limited to the Italians.”

Then, we highlighted research on the banks that had the highest exposure to Italian sovereigns. Going one step further, in looking at overall exposure, not just sovereigns, an article in Frankfurter Allgemeine Zeitung highlights that,

“France’s banks have the most to lose in Italy”.

Drawing on data published by the BIS, the article notes that the French claims on Italian counterparties,

“amounted to $311 billion, of which $63 billion was to the Italian government.”

As the article notes somewhat cynically is might explain why Macron is so gung-ho about a European banking union.


A little bit closer to home, the Dallas Fed released its Manufacturing Outlook Survey and the general trends remain intact with good readings across production and orders. Capacity utilization raged to the highest reading since 2006 and some respondents were worried about pricing pressures, whether in raw materials or in wages.

This month’s survey asked additional questions about wages and input prices, the responses to which are worth perusing and vary from one paper manufacturer who is somewhat dour, saying,

“Business volume is outstanding. Margins are terrible”

to a building equipment dealer who has found some creativity,

“Things we used to not charge for we are using as upgrades and charging to make up for input prices rising.”