What’s happening here?

Italy is embroiled in a dramatic power struggle between eurosceptic populists and pro-EU establishment lawmakers.

The country has been plunged back into crisis mode after several weeks of protracted negotiations between anti-establishment groups ultimately failed to produce a new coalition government. While there was no outright winner, the populist Five Star Movement (M5S) secured the largest chunk of the vote and soon sought to join forces with the far-right Lega (League) group in an effort to set Italy on a path toward forming a new coalition government. However, government talks broke down over the weekend after the surprise resignation of Giuseppe Conte, a little-known law professor that M5S and Lega had selected as the country’s next prime minister. Conte officially stepped down Sunday, following President Sergio Mattarella’s decision to reject the parties’ controversial choice for economy minister. Italy’s head of state, who was installed by a previous pro-EU government, refused to accept the nomination of eurosceptic candidate Paolo Savona for economy minister, according to CNN.com.

One day after an unprecedented, record crash in Italian 2Y bonds and a rout across the entire bond curve as well as Italian stocks, which proceeded to spill out and impact other European banks and moved up the Euro amid a growing political crisis in Rome, Italian bonds rebounded in early European trading as the panic liquidation was put on hold for now, sending 2Y Italian yields as low as 1.925% after hitting a 5 year high of 2.84% on Tuesday. The 10Y yield also faded as buyers emerged for the benchmark Italian BTP, which was last trading just above 3.00%. The debt office sold €5.6BN in bonds this morning including €1.82BN worth of 10-year bonds. And with a bid-to-cover ratio of 1.48 times, the highest since December, according to the zerohedge.com.

We will see how this situation develops. On forex we can see little movement of Euro. We can consider this situation as dangerous, because there are doubt about Italian economic future and the EU future as well. Italy as a PIIGS member is set as potentially risk economy in the EU, known for its dept, but Italy is still one of the largest EU economy.

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