MILAN-FTSE/MIB : Is an exit of the European Union the solution?
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07/16/2012 | 09:04am
Opinion : Check out the trading range breakout 13500 / 14500
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Investors focused on Italy last week. Several major players each expressed their views on the third economy of the Eurozone. This is Mario Monti who made the first statement on Tuesday saying that the government did not exclude the possibility of using the European bailout fund in order to face interest rates that are not sustainable in the long term. The yield on 10-year BTP (Italian bond rate) has increased since March from 5% to 6%, the Europe Agreement found in late June between EU leaders did not allow easier condition on Italian rates.
On Thursday, Moody’s downgraded the country's rating from A3 to Baa2. The U.S. agency highlighted an increased risk of contagion from Spain and Greece. Moody’s said that the short-term economic prospects have deteriorated. This statement followed the forecast of the Bank of Italy about a GDP contraction of 2% for 2012 against 1.5% previously. It also tightened the government task as Italian ministers just announced the previous week a plan of economy of 26 billion euros over three years.
In this difficult economic outlook, Bank of America/Merrill Lynch rekindled the debate about exits of the Eurozone saying last Friday that it was Italy which would most benefit from a return to monetary sovereignty. Analysts of the U.S. bank said that the country could greatly benefit from an “orderly and voluntary” exit. Indeed, Italy is the only country with Germany to release a primary budget surplus (surplus of government budget excluding interest payments on outstanding debt). Given the weight of exports in the economy, GDP would increase by 3% in case of favorable currency impact. An orderly exit could enable Italy to find the path to growth and quickly take advantage of much current economic efforts.
Technically, the FTSE / MIB has decreased by 9% since the beginning of the year. The index bounced back from its lowest level of 2009 (12300/12500 points) in the direction of the 20-week moving average that stopped its progression around 14 200/14500 points. The break of this moving average in weekly data would validate the hypothesis of a trading range with the 16800/17000 points as target. Conversely, another test of the 12 400 points could lead to a resumption of the bearish trend and record lows since the 2000s.
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Rodolphe Steffan
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