09:53 Short FTSE
Entry: 5551.8
Stop: 5580
Stop: 5580
Take: 5510
Exit Timeframe: T+2
This morning we opened with a relief rally as Berlusconi handed over as expected. This has given us a rare moment of strength to add a short position as the EZ situation is set to deteriorate. Added to this, Italian BTP auction was weaker than expected causing the highest cost of debt since 1997 in Milan. Therefore any strength is related to ECB buying, which is currently limited in scope.
We also expect that much of the new issue was dumped on Italian banks, further exacerbating leverage issues and deep sovereign risk.
"Italian banks are too exposed to sovereign risk. Despite a conservative business model centred on commercial banking, Italian bank bonds are sharply underperforming. Italy’s banks own between 5-13% of assets in domestic sovereign debt, a multiple of their market capitalization. Thanks to positive carry on these government debt holdings, they have reported increases in interest margins. But these gains may prove short-lived. Over time, we believe government debt exposure could transfer risk from the sovereign to Italian banks and then to the rest of Europe – with French banks next in line. "
***EDIT 11:18*** Exited at 5512 for +42.8pts, risk ECB intervention into BTPs
"Italian banks are too exposed to sovereign risk. Despite a conservative business model centred on commercial banking, Italian bank bonds are sharply underperforming. Italy’s banks own between 5-13% of assets in domestic sovereign debt, a multiple of their market capitalization. Thanks to positive carry on these government debt holdings, they have reported increases in interest margins. But these gains may prove short-lived. Over time, we believe government debt exposure could transfer risk from the sovereign to Italian banks and then to the rest of Europe – with French banks next in line. "
***EDIT 11:18*** Exited at 5512 for +42.8pts, risk ECB intervention into BTPs
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