Italian Job.

There you go. Spain last time, Italy this time. When you are looking for a "something" to catalyse a positional shake down you really can't do better than giving the Euro-periphery a shake and seeing what comes out.

TMM are still asking themselves the question "Is this a new theme?" or is this still a "positional shake down within the underlying trend?"

Europe - Italy. The noise function is off the scale with media and market commentary screaming return to Eurodoom. As ever, those furthest from the event end up reacting to the noise rather than the reality because we have noted that markets work a reverse physics, where sound travels faster than light as enlightenment arrives a good while after the noise. "Rest of the World" do seem to be playing this harder than Europe itself. We note that overnight European and  US equity futures traded pretty flat whilst Asia went through its catch up phase, leaving us thinking that noise vs price is, at least in the short term, overdone with the Western markets more likely to bounce from opening lows than extend yesterday's momentum. 

Is Italy important?  It's certainly a wake up call rumble from the dormant Euro-volcano but we don't think that Italy is going to drag Euro back to 2012. If the interface of Euro contagion is based on Italy's commitment to Europe combined with the management of debt load via internal economic management or European support then perhaps we should break it down. 

Commitment of Italy to internal debt management - Italy's primary surplus of 5% of GDP puts it in good stead. Its long term debt structure is well known and short of a market attack, which we think would be repelled by Dr. Aghi, we see long term Italian debt remaining as taboo to shorter term trading as is US and UK  debt. Will the new government mean new change? Well the very fact that one of the complaints is that no legislation can be passed may well mean that a move from existing policy cannot be implemented. Not all bad news.  

Commitment to Europe - The only hint of anything apart form general support for Euro membership comes from Grillo's comment that discussing it is not taboo. The success of Grillo as a whole is a vote against the current structure of Italian politics as much as it is pure anti Europe and TMM don't see a strip down and rebuild of the machine of Italian politics as a bad thing. In fact we have written various posts questioning the divergence of career politicians from both roles of representation and decision making. TMM hope the grey machine of Brussels is taking note. However, we digress. Whilst Europe is still seen as the hand that ultimately feeds, TMM don't see Italian politics doing any more to rock the boat than cause a enough ripples to persuade its occupants to sit down and shut up.  

Commitment of Europe to Italy - As an Italy departure is the nuclear option we can hardly see the self-serving Eurocrats pressing the assured mutual destruction button. What is more, with Merkle coming up to elections and the German opposition more pro-Europe than her, there is probably less likelihood of her playing hardball this time over austerity demands. We are still miles from needing the "Dr. Agahi Put" and even further off the Greek scenario. So TMM are not concerned as the current wave  hasn't even reached the first Euro-defences.

So if we are not as concerned about Europe as the media is (cue more disgust at media hyperbole. c.f. UK debt downgrade) then should we be buying Euro stuff? Very short term yes and we have just whilst the noise dies down and marries back to price action again (see above). But for the bigger picture on global markets we see the Italy story as another seed crystal dropped into the supersaturated solution of confident longs.  Last week the Fed tripped the US but the markets staggered to their feet and now Italy has delivered an upper cut that saw the market hit the canvas last night. As it now staggers around drunkenly, we don't think it would take much of tap from any bad Asian news to see it down and out. 

It was interesting to see Japan try and deliver that blow last night. Jpy retracement fitted into the general positional rather than thematic shake down and as we are judging short term noise to enlightenment signal stretched we are closing out half of our short NZD/JPY and MXN/JPY. In equities we continue to sit on our hands enjoying them getting cheaper.