Background of the Italian Economy
Italy is the third largest economy in the Eurozone and is therefore an important player, but has spent much of the 2000s suffering slow growth, becoming steadily less important over the long term. Where the country becomes more important is in terms of its debt levels, stuck as it is with one of the highest debt/GDP ratios in the eurozone at more than 120%, according to Eurostat figures.
It is the third largest debtor nation in the world behind Japan and the US – who, let us not forget, are both with their own currencies and their own central banks, which are much more able to lend support to their bond markets and economies.
Such large debts mean that the country is particularly sensitive to the rate of interest it has to pay on its bonds. This is particularly important when it has to refinance maturing bonds and issue new debts. If the rate of interest climbs too high, the country simply can’t fund itself and that’s when it would require support from the ECB, though that would come with terms attached, such as austerity measures.
Given there are so many Italian bonds out there, they are of particular systemic importance as they are widely held by European banks, particularly French and Italian ones. So in that sense Italy is an incredibly important player in the eurozone economy and what matters there really matters to the rest of the world.
However it’s worth remembering that 85% of Italy’s debts are internal, compared to the eurozone’s other bete noir, Greece, which has 75% of its debts being external. Italy’s debts have already largely been priced into the euro too.
And unlike Greece and Ireland, who went on wild spending sprees with Germany’s credit rating, Italy’s problems are simpler – it ‘just’ has a black hole of lost revenue. While the political jostling for position continues in Italy, all plans for growth and amendments to austerity plans will be put on hold. And credit ratings agency Moody’s has already said that political uncertainty will continue, and warned of a ‘deterioration in the country’s economic prospects…’ (and) difficulties in implementing reform.
Whatever the makeup of the eventual government, most analysts are agreed that sorting out the debt levels was key. Italy should steer away from grand gestures and instead get back to basics. In Italy’s case, the state does not need to cut taxes, as Berlusconi suggests, but make people actually pay them, he says. ‘If you inherit a troubled economy with low or no growth, it doesn’t matter what your bold polices or pledges are because little can be done. Policy will be dictated by what the country needs to do to repay the debt.’ Continuing with some form of austerity, even if it’s not entirely along the lines of
Monti’s blueprint, will be unavoidable – and with good reason.
It’s worth remembering that 85% of Italy’s debts are internal, compared to the eurozone’s other bete noir, Greece, which has 75% of its debts being external.
MIB | Italian 40 Index Spread Trading
The Borsa Italiana, home to Italy’s MIB-30 is now part of the London Stock Exchange Group (LSE) following 2007’s takeover. Up until 2004, the Italian stock market used to be gauged on the performance of the MIB 30 index, an index of the top 30 companies on the Milan stock exchange. After that it became the S&P/MIB, and included the top 40 stocks from the Borsa Italiana, the Italian stock exchange, and from 2009 it has been referred to as the FTSE MIB. The index is referred to simply as the Italy 40 by some spread betting companies. The changes came about because of changes in administration of the index. By the way, MIB stands for Milano Italia Borsa.
The companies are chosen from all of those on the Italian market based on popularity, and examined for basic principles such as financial viability and the number of firm shares that are available to the public. It is also weighted with respect to the different industries represented, to form a cross-section of the Italian market. Some of the companies you may have heard of include Pirelli who make tyres, Tenaris who are in the iron and steel business, Enel Green Power, and a number of Italian banks. During 2011 the index sank quite a bit, reflecting the continued issues with the European economy.
If you have an interest in European financial affairs, but do not have the time or resources to spend researching individual companies, then you may find that spread betting on the indices of the various countries will be the best way for you to practice your trading skills. A good starting point is to consider the overall health of the country’s economy, and for this you can use the usual indicators such as the unemployment figures and industrial output. With research, you can find out the issues that affect profitability the most, and know which factors to watch closely.
When you are trading or spread betting on a collection of values, such as an index, you may be concerned how you can combine your knowledge of technical analysis with the different sectors that make up the value. This should not be a concern, as one of the principles of technical analysis is that any financial market will tend to follow the same analytical principles. Even though the price is a composite of many values, the overall predictability of the market can still be achieved in the same way. In several ways betting on an index is easier, as the news about a country is more readily accessed than that of individual companies.
You should watch the index for a couple of weeks before risking real funds in spread bets. It is always better to learn about a market before you have money at risk and are emotionally attached to the result. Pay particular attention to the volatility, so that you can more easily assess a reasonable amount to bet on the movement of the index. You must make sure that any bet you place cannot result in you losing more than you can afford, even if it turns against you.
Spread Betting on the Italian 40 Index
When you are spread betting on indices, you are spreading your spreadbet across the performance of several, perhaps many, companies in the region of the index, often a country. Therefore, the index reflects the overall economic health of the country, in this case Italy, and you are not dependent on an individual company with its own management decisions which may or may not work in your favour. For this reason, many spread betters prefer to bet on indices than on individual shares. The current price for the Italian 40 index on IG Index is 16,441.8 – 16,481.8.
If you believe that the Italian economy is recovering as a whole, and that the FTSE MIB index should rise, then you should place a long spreadbet on the index. This spread betting provider allows a bet as small as 20 pence per point, because even a small percentage move will count for many points, given the size of the number. Say you decided to stake 40 pence per point on a buy bet.
Your buy or long bet will go on at the higher price of 16,481.8. As a rolling daily bet, you may be charged a small amount each evening when the bet is automatically rolled over for you. Unless you finish up holding the bet for a period of months, it is unlikely that this amount will be significant compared with the volatility that you will encounter.
When you were doing your research into this index, you probably noticed that the daily fluctuations could be as much as 300 or 400 points. In a couple of months, it has moved more than 3000 points. Perhaps this time you will see the index go to 17,936.1 – 17,976.1, and decide it is time to close your bet and collect your winnings.
Because this was a long spread bet, the bet closes on the lower price of 17,936.1. It is always a good practice to check your spread betting provider’s calculations of how much you have won, as mistakes can be made. In this case you opened your bet at 16,481.8, and stayed with it all the way up to 17,936.1, when you close the trade. This means that you have gained 17,936.1 less 16,481.8 points in the bet, and that works out to 1454.3 points.
You decided to wager 40 pence per point, so you have won 1454.3 times £.40, which works out to £581.72.
Whenever you spread bet or trade on the financial markets, you must accept that some of your bets will not work out, and you will be forced with the decision to close the bet and accept your loss. Once it is clear that the bet will not win, you need to close the bet quickly to cut your losses. Say the index went down to 16,267.3 – 16,307.3, and you closed the spread bet.
Once again, your spreadbet went on at 16,481.8, and this time it closed at 16,267.3. That means you lost 214.5 points. Because you kept the stake low, at 40 pence per point, you have lost just £85.80.
Join the discussion