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An Italian job

Shares were battered and bonds rallied overnight. The US dollar and Japanese yen rose as investors sought safety. Oil and copper slumped. The explanation is that Italy is in political crisis and it may be the beginning of the end for the Eurozone. The absurdity of the proposition was drowned in panic.

Italy became a republic in 1946. The number of governments since then is approaching 70, meaning the average life span of an Italian government is just over one year. The looming elections are the product of the President refusing to endorse a ministry that put noted Euro-sceptics in key ministries, and instead put forward a former IMF member as the Prime Minister. These facts suggest the current political crisis in Italy is 1) entirely normal, and 2) no threat to the European Union.

The more likely explanation is that this is an old-fashioned market panic. A stronger run of data over the last few months has stock market indices once again in expensive territory. With the memory of February’s sell-off still fresh, investors’ nerves are taut. This could mean there are potential opportunities for cool-headed investors. However the nature of panics is hard to predict, and the timing of a panic is very liquid. Alert market-watchers will be contemplating v-shaped recoveries, rounding bottoms and signs of consolidation.

Asia Pacific futures are pointing to a more measured response from regional markets, with opening falls of less than 1% in most cases. These compares to routs of 1.5% to 3% in overnight action. Panicking investors often ignore facts, but the release of data over the next 24 hours may short circuit selling momentum, Japanese retail sales, German jobs and inflation, French GDP and the release of the Fed’s preferred inflation indicator in the US all have potential to change market thinking.

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