Italy stocks enter bear market as budget crisis rolls on

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• Italian stocks enter bear market as global sell-off
  adds to domestic economic pressures in the country.
• The benchmark FTSE MIB index was down 20.1% from its
  recent high on Thursday morning, marking bear
  territory.
• Italy’s budget crisis has been a major driver of recent
  weakness, with the country’s government clashing with the EU
  over proposed spending.
• 
  You can
  follow Italian stocks at Markets Insider.
  

Italian stocks briefly entered a bear market on Thursday as

the sell-off gripping global markets adds to the country’s
already dire economic situation. (A bear market is reached when
an index drops 20% or more.)

The
benchmark FTSE MIB index was down around 1.6% this morning,
trading at a low of 19,414 points as of 9:10 a.m. BST (4.10 a.m.
ET), dragged lower by a global flight to safety triggered by
fears around rising bond yields, and a stern warning from the
International Monetary Fund about threats to global financial
stability. 

That meant the FTSE MIB had fallen 20.1% since its recent high of
24,544 points in May this year. Since dipping below that level,
the index has rebounded a little, but remains within a whisker of
a bear market.

The chart below illustrates that drop:

Investing.com

While most stock markets are contending with fears of a global
slowdown, Italian investors have also got to consider a cocktail
of domestic risks,
largely linked to the country’s ongoing budget crisis, which
has seen its government clash with the European Union over its
spending plans.

The budget proposes increasing both Italy’s overall government
debt and its deficit in the short run. This in turn risks the
country falling foul of EU fiscal rules.

European Union authorities have already asked Italy to amend its
budget to avoid such an outcome, but the coalition’s eurosceptic
party leaders are refusing to do so.

“The government is still calling out the EU for its restrictive
fiscal rules, vowing not to back down in the face of demands to
amend its 2019 budget,” Claus Vistesen of Pantheon Macroeconomics
wrote to clients on Thursday.

The situation has been made even worse by a discussion of the
widening spread between Italian and German bond yields by Salvini
on Wednesday.

The spread — the gap in yield — between Italy’s 10-year bond and
the 10-year German bund is now over 3% and rising, reflecting
how much riskier Italian bonds are than German ones in the eyes
of investors.

“Mr. Salvini committed the cardinal sin yesterday of giving
markets a target,” Vistesen said in a report. Salvini said,
Vistesen wrote, that the 10-year BTP-Bund spread won’t go to 4%
and that the government will take action if it does. 

“You don’t have to be a bond market veteran to predict what
happens next,” Vistesen said.

A further widening of the spread between German and Italian
yields would be seen as reflecting increased fears about Italy’s
economic state, which in turn would likely see stocks in the
country sell-off even more aggressively.