Rumblings in the distance. Italy the next target?

Sovereign credit has been very much in the spotlight, be it Greece or the others.
Could Italy be the next to be caught in the crossfire?
The longer term argument for sovereign bonds remains the delicate balance between deflationary and inflationary pressures on the one hand, and the tug of war between large supply coming and possible increase in domestic demand as baby boomers, among other investors disappointed by equity, shift to income and buy government bonds.

We have been bearish on UK gilts for a long time, flattish on US treasuries, and warned not to be short german bunds. At the moment even the bunds could be at risk though, at least for a short while.

The concern we are divining from the rumblings and the gossips comes from the focus on the swaps that were used by Greece to hide its real public debt. From there it is a small step is now to move onto looking at all the swaps that Italy did in the 90's with similar aims.

Up to now Italy has been considered relatively safe from a sovereign point of view: the deficit is not too bad (though the overall debt is). The spread between its bonds and the German ones is comparable, or even lower, than the UK one.
If concerns arise on the veracity of public accounts, including local authorities, it won't be pretty.
Even if there is no substance to those concerns, even if the current numbers are reliable, it won't be pretty.

The chance of the rumours growing and spreading, and acquiring weight, are maybe slim. But it is worthwhile to be careful.

See the FT, Risk magazine, and the Economist for details.

Oil and Patriots

News of a defensive buildup on the southern shores of the Gulf are coming in, together with Obama stating that they can't really stop Iran from making nukes if they really really wanted to.

Not surprisingly oil has been slowly drifting up, though the unexpected inventory buildup in the USA is putting a dampener on that. 

The haruspices closed their spread trade, and are wondering on the next stage for petroleum.

Overall, we suspect the current round of news is not enough to keep oil on the boil. The weakness in the global economy and the news from China are negatives.

But some much more dramatic news could hit the tape any time. So with december oil futures at 80~, it is not enough to take a position (apart from the usual lottery tickets - long calls at very high strike prices).

Let's wait a bit more.