Hello Eoin, agreed: spreads in Euro area are to be looked closely, with a first trigger possibly the elections in Italy (beginning of March). Limited advances in terms of reforms and budget consolidation indicate Italy has thrown away the opportunity offered by QE to mend its ways. A slowdown in global economic growth or the implementation of protectionist measures may curb the country’s only engine of growth, i.e. its (thank God) very strong exports. It is a delicate situation which - but this is just a gut feeling - does not seem to be fully appreciated by market participants (Italy's equity market has been so far relatively strong).
Italy’s upcoming election is unlikely to result in strong government but it could usher in another populist administration inspired, if not led by Silvio Berlusconi. Against that background there is little chance of the reforms needed to set the economy back on a path to anything close to fiscal rectitude.
An open question is how much Italy has gained from having an Italian as head of the ECB. It certainly hasn’t hurt that the head of the central bank has some sensitivity to the needs of those on the periphery of the group. We’re going to get an answer to that question a year from now when Mario Draghi’s term expires because his replacement is likely to be from somewhere within the Germanic sphere of influence.
Italian 10-year yields remain relatively inert as the range around 2% not least because of ECB buying. That is likely to represent less of a tailwind as the ECB persists with tapering.
The stock market meanwhile continues to steady from the region of the trend mean.