A Political Crisis Upends Italy ETFs

Italian markets and country-specific exchange traded funds plunged Tuesday as the prospect of new elections fueled speculation of the potential rise of an anti-euro zone faction.

On Tuesday, the iShares MSCI Italy Capped ETF (NYSEArca: EWI) declined 6.3%% and Franklin FTSE Italy ETF (NYSEArca: FLIY) decreased 5.8%.

Fueling the anxiety in the Italian markets, six-month Italian debt, which sold for a negative yield as recently as April, now drew a yield of 1.213% on lackluster demand from investors while two-year bonds, which came with a negative yield as recently as two weeks ago, traded at a 2.69% yield, the Wall Street Journal reports.

The sudden distaste for Italian assets intensified on worries that the Eurozone’s third largest state could exit the bloc and may even trigger further breakdown in the euro currency union.

Stay Away From Italy

“Given recent developments, it seems unlikely we will have better visibility in the coming months, particularly if new elections are in the pipeline. As a consequence, we would expect international investors to stay on the sidelines at least until the political turmoil cools,” SocGen strategists said, reiterating their underweight stance on Italian stocks, according to MarketWatch.

All of the speculation may be traced back to Italian President Sergio Mattarella’s decision to block the formation of a euroskeptic coalition government formed of the antiestablishment 5 Star Movement and the League parties, fueling concerns of a new elections, which could strengthen anti-euro zone forces.

“It’s not clear what the ECB can do. It’s not really a liquidity issue, it’s not a confidence issue in the same way as 2012 was,” Kit Juckes, chief foreign exchange strategist at Société Générale, told the WSJ. “This is about a country where the parties rising fastest in the polls might just not be keen on being in the euro.”

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