Global Markets: Watch Italy, Not Just Cyprus

With US macroeconomic data looking strong and short-term GDP growth momentum picking up in China, the renewed turmoil in the euro area is a stark contrast.

To be fair, markets appear to have largely shrugged off concerns about the broader eurozone implications of Cyprus’ financial crisis. The euro has weakened, but it is holding onto key support around US$1.28-1.29/EUR. In addition, there has been a relative lack of panic in eurozone periphery sovereign bond markets, with Spanish and Italian 10-year yields actually looking as if they could head lower after a brief spike in the aftermath of the Cyprus bailout announcement.

All these trends suggest investors believe potential contagion from Cyprus’ banking crisis is minimal. This chimes with our own view that, while indicative of bureaucratic inertia at the eurozone level, the bewilderment created by the Cypriot bailout has limited implications for how policymakers are likely to deal with future bailouts.

We believe that, rather than Cypriot banks, the current political deadlock in Italy represents the biggest near-term threat to eurozone stability and the medium-term euro trajectory. We therefore remain sceptical of the sustainability of the peripheral debt rally.

This Week’s Trivia Question

Last week’s question connected the Yugoslav and Chechen conflicts. We asked which American actor starred in both an early 2000s Hollywood film about the rescue of a downed American airman from Serbian-controlled Bosnia and a 1990s fictionalised portrayal of a US-Russia nuclear stand-off over the former’s support for Chechen separatists. (Hint: the actor’s character had a similar occupation in both films.)

The answer is Gene Hackman, who played an American admiral in Behind Enemy Lines (2001) and a nuclear submarine captain in Crimson Tide (1995).

This week’s question has an Easter theme. Which prolific spy thriller author wrote a novel in the 1970s that ends with the revelation that Jesus did not die on the cross, but was in fact substituted by another prisoner? And, along similar lines, which Asian country has a small town that claims to have the ‘Tomb of Christ’?

This blog is tagged to:
Sector: Commercial Banking, Country Risk, Financial Markets
Geography: Cyprus, Italy

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