So much has happened in such a short space of time during the periphery recovery that it is easy to forget just how far it has come.
Sure, there was a spike in yields late last week and the periphery sovereigns’ spreads over Bunds widened again at the start of this week. But that was after Spain took €5bn out of the market in the middle of last week with a debut linker, and Italy placed €7bn of 15 year paper. Spain’s deal was around four times oversubscribed, Italy’s three times.
That investors are going to suddenly start ditching the periphery after demanding so much paper from the region’s two biggest credits is pretty hard to believe.
After all, the warning signs of a strong showing for fringe parties in this week’s elections have been blaring for some time, well in advance of last week’s spike.
Far more likely, this was just a bit of profit taking before the elections, a bit of breathing space to see how the land will be laying afterward.
Take last year’s Italian general election, which had a larger than expected showing by a comedian (not Silvio Berlusconi this time, but Beppe Grillo of the Five Star Movement). Despite a hike in yields, it wasn’t long before Italy was trading back in line with Spain.
The fact of this recovery has been, rightly or wrongly, that liquidity has trumped any fundamental concerns. That the European Central Bank looks likely to introduce more dovish measures in early June is a sure sign that the sell-off of the last week is just a bump in the road.
That’s especially true as fundamentals have also been improving. Even though eurozone GDP figures for the first quarter of the year were poor overall, they were nowhere near the dreadful numbers at the height of crisis — and in any case, less growth means more chance of quantitative easing and that means more liquidity.
Of course, the wisdom of investors drunk on liquidity and thirsty for yield diving head first into only freshly recovering economies is open to debate. But what is not in doubt is that they will.