“Judging by the continued jitters in Italy’s government bond market, which has suddenly become the most closely watched gauge of investor sentiment, last week’s panic over the formation of the first populist and Eurosceptic government in a leading European economy was justified.
“More worryingly, Italy’s political crisis has exposed the vulnerability of Europe’s banks which – unlike their US peers that were recapitalised and subjected to rigorous stress tests soon after the global financial crisis erupted – remain saddled with non-performing loans (NPL) worth around €1 trillion (US$1.17 trillion) and have been forced to grapple with negative interest rates, which have eroded their already weak profitability.
“Confidence in Europe’s banking sector has once again been undermined by the “doom loop”, a self-reinforcing and highly contagious cycle of financial stress stemming from banks’ large holdings of government bonds, resulting in weak banks and risky sovereigns dragging each other down during periods of market turmoil…
“Even Italy’s own central bank governor warned that the country “was a few short steps away” from losing “the asset of trust”.
“While there are plenty of other potential triggers for the next crash, ranging from the pitfalls of unwinding years or ultra-loose monetary policy to a sudden re-emergence of concerns about China’s economy, the scope for Italy’s banking woes to rapidly become a systemic threat to the global economy is considerable, despite efforts over the past several years to “de-risk” Europe’s banking sector…
“Combine Italian populism with the end of quantitative easing and a vulnerable banking sector, and it is once again Europe that is sowing the seeds of the next financial crisis.”
“The [UK] high street has recorded its worst year-on-year May performance for 12 years despite the royal wedding, warm weather and two bank holidays, figures show.”
“…while economic collapses aren’t good for anyone, it’s everyday Americans who are left particularly exposed, their very livelihoods threatened. If Main Street’s lagging recovery from the most recent financial crisis is any indication, they will be playing catch-up for years…”
“As the Fed continues to press forward hiking rates into the current economic cycle, the risk of a credit related event continues to rise. For all the reasons currently prognosticated that rising rates won’t affect the “bull market,” such is the equivalent of suggesting “this time is different.” It isn’t.”
“U.S. government debt prices rose on Thursday as investors pivoted toward safer assets amid growing concerns about emerging market risk.”
“A sharp drop in Brazilian stocks and its currency stoked a decline in emerging-market assets Thursday, as concerns over trade tensions and a rising dollar reverberated around the world.”
“Argentina and the International Monetary Fund reached a three-year, $50 billion loan agreement Thursday, which is subject to IMF executive board approval. Why it matters: Argentina requested IMF (International Monetary Fund) assistance last month after the peso currency plunged, threatening the country’s ability to pay off its debt amid high inflation and anemic growth.”
“Venezuela has been named the least secure country in the world for the second year in a row, as the once-prosperous country struggles to recover from the worst economic crisis in its history.”
“”Addressing the banking sector balance sheet issues and improving the performance of particular public sector banks is a very important issue for India to support investment and its inclusive growth agenda,” IMF Spokesman Gerry Rice told reporters at his bi-weekly news conference.”
“Chinese policymakers have been focused on a deleveraging campaign, with total social financing, a measure of credit growth, decelerating to 10.5% year-on-year in April, the slowest reading since 2005. The main driver of that slowdown has been a contraction in off-balance sheet lending. That in turn has helped drive an increase in corporate bond defaults…”
“[Japan’s] Gross domestic product shrank 0.6 percent on an annualized basis in the first quarter, according to revised data released on Friday, as a weaker reading of private consumption offset a stronger one for capital investment. That missed the median forecast of economists.”
“Emmanuel Macron has called on other members of the G7 to stand up to Donald Trump’s trade policies in the face of what he described as the threat of a new US “hegemony”.”
Subscription only – but I agree with the sentiment.