US Markets soared yesterday on news that Italian Prime Minister Silvio Berlusconi plans to resign after losing a key vote in Italian Parliament.
First Greece (which is still awaiting another Prime Minister) and now Italy: if a 50% Greek haircut more or less did in Prime Minister Papandreou, I wonder what a 50% haircut for Italy would do to the next Italian Prime Minister, assuming of course that the world is still standing after the financial Armageddon that would ensue if Italy were to default.
US Markets, on the other hand, loved Prime Minister Berulsconi’s alleged departure, as swapping Prime Ministers seems to be the new solution to fixing sovereign debt crises. My gut tells me, however, that Italy is next on the chopping block, and today’s market gains are likely hopes that the “new prime minister” fad currently engulfing Europe will actually work.
Investors who traded the MSCI Italy iShares ETF (NYSE:EWI) today hoped that a new head of state would fix Italy, as the ETF registered a +2.49% increase. Investors appear to feel the same way about the CurrencyShares Euro Trust (NYSEARCA:FXE), which also registered a .42% gain. Both (NYSEARCA:EWI) and (NYSEARCA:FXE) are both accurate indicators of investor confidence in European affairs, and for right now, investors feel that Europe is not falling apart.
I failed to mention earlier that the Italian 10-year bond interest rates have hit 7%.
In other mundane news, the SPDR Gold Trust (NYSEARCA:GLD) fell today, likely because investors feel that fiat currencies including the Euro are better than mans’ traditional method of exchange. (NYSEARCA:GLD) fell 0.83% today, and this ETF typically moves opposite major fiat currency directions such as the US Dollar or Euro Dollar.
Bottom Line: After last weeks Grecian debacle and today’s Italian PM news, I am indeed curious (this is an understatement) as to if, how and when the ongoing European drama will continue and conclude. As of today, I am hesitant to believe that simply switching prime ministers and giving 50% haircuts will work for larger countries such as Italy and Spain, let alone Greece.
Disclosure: No positions in ETFs or stocks discussed in this article.
John Nyaradi is the author of The ETF Investing Premium Newsletter.