Italian bonds are facing their toughest day since May but it could still get much worse from hereon
It's going to be a long and dragged out ordeal in Italy as the populist government pushes forward with their agenda of a budget deficit of 2.4%. The euro has continued to be pressured on the day while Italy's main stock index is set for its biggest decline since May 2016. This, as Italian bonds are being taken to the cleaners with 10-year yields rising by more than 31 bps on the day.
Italy's budget proposal to the EU is set for 15 October, after which the EU will review it and decide to accept or reject said proposal. At this point, it's not looking likely that they would accept a deficit target of 2.4% which will include fiscal plans put forward by the coalition government during their election promises.
It's very much setting up for a clash that will indubitably cause much more jitters to come, and raising the possibility of Italy threatening to leave the euro. And I don't see how the single currency can pull off any sustained rallies as long as that factor remains a probable scenario in the month to come.
Add to the fact that there is an added risk as we approach the end of October with credit rating agencies set to deliver their review on Italy's bonds. S&P is set to deliver their rating decision on 26 October while Moody's - who postponed their decision from August - said it will do so "at the end of October".
A ratings downgrade will just tip things over the edge and that doesn't bode well for Italian investors as well as the euro. It's going to be a long, long month by the look of things.
