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Get ready for another periphery rally

By Craig McGlashan
27 May 2014

Naysayers claimed that the remarkable run for the eurozone periphery since the turn of the year could be over after a sell-off in the sovereigns’ debt a couple of weeks ago. But with the European Parliamentary elections out of the way and pro-EU parties just about topping the bill, there is plenty of room for the rally to go on.

While the London-centric UK press were typically navel-gazing about what the “success” of the anti-EU UK Independence Party in last week’s European elections meant for the future of Britain in Europe (and of course giving its standard cursory glance to events in France, if only because things looked even worse there from a Euro-mantic’s perspective) the real story of the elections was playing out elsewhere.

In Italy, the reforming government of Matteo Renzi must have been the toast of Brussels after taking more than 40% of the vote and leaving the anti-EU Five Star Movement — not to mention Forza Italia, the party of Angela Merkel’s least favourite politician Silvio Berlusconi — well behind in the voting.

If ever there was a mandate for a politician to make some much needed and long overdue changes to Italy’s political and economic set-up, this was it.

It was a closer run thing in Greece, where Syriza, of the radical left, took a higher share of the vote than the ruling New Democracy (ND) party, but taking ND’s junior coalition partner Pasok/Elia’s share into account, the government actually came top.

Of course, there were some nasty outcomes in the periphery as there was in the core — a third place finish for far right nationalists Golden Dawn in Greece perhaps the worst.

But each of the periphery governments has been given a mandate to continue pretty much as they were.

Overall, aside from the unexpected boon for reform in Italy, the results were pretty much as expected, suggesting that the periphery sell-off of the past two weeks was nothing more than investors booking gains ahead of potential volatility from the elections.

Now that hurdle is passed, it is clear by the fall in periphery yields at the start of the week that those investors that left are back again with some long plays.

Attention will turn to the ECB’s meeting in early June, where officials couldn’t be dropping heavier hints of dovish measures unless they streaked at the opening ceremony of this year’s football World Cup, covering their modesty with a placard saying “rate cut imminent”.

The periphery rally has been, is and will remain about liquidity. Last week’s elections were an entertaining sideshow, but get ready for the normal service of tightening spreads and falling yields to resume.

By Craig McGlashan
27 May 2014