Wednesday 22 May 2024 opened with a negative note for the Milan Stock Exchangewhile it spread between Italian BTPs and Bunds Germans recorded an increase.
In detail, the Ftse Mib index, the main indicator of Italian stock exchange lost 0.14%, reaching 34,552 points. At the same time, it spread between Italian BTPs and ten-year German Bunds recorded an increase, opening at 130 basis points. This value represents an increase compared to the 129.2 points of the previous day’s close. The annual yield on Italian government bonds rose by 4.8 points, reaching 3.83%, while that of German Bunds increased by 4.2 points, reaching 2.53%.
The stock market performance and the spread are two key indicators of a country’s economic health. A decline in the FTSE MIB index may reflect investor concerns about economic growth, political stability or other risk factors. The increase in the spread, on the other hand, indicates a greater perception of the risk associated with Italian government bonds compared to German ones.
Predictions and consequences
The increase in the spread can have different negative implications on the economy. First of all, an increase in BTP yields means that the Italian government will have to pay more to finance public debt. This may result in a higher expenditure intended for interest on the debtreducing the resources available for other sectors.
In general, a climate of uncertainty and an increase in financing costs can discourage investment by businesses, slowing down economic growth, so banks, to compensate for the greater perceived risk, could increase rates on loans granted to families and businesses.
Not surprisingly, this general feeling is confirmed by the performance of the Milan Stock Exchange. A decline in the stock market in fact reflects a decrease in investor confidence in the Italian economy. This lack of confidence can lead to a reduction in both domestic and foreign investment, slowing economic growth.
In fact, publicly traded companies use the stock market to raise capital. A declining stock market can make it more difficult and expensive for these companies to issue new shares or raise money through initial public offerings (IPOs). This can limit their ability to expand and invest in new projects.
Finally, let’s not forget that many Italians invest directly or indirectly (through pension funds and mutual funds) in shares. A declining stock market can reduce the value of investment portfolios, negatively impacting household wealth. This can lead to a reduction in consumer spendingfurther slowing the economy.
The impact on economic growth and employment
The choices that companies make to react to a declining stock market often coincide with cutting costs, which often translates into staff cuts or a reduction in hiring. This can lead to an increase in unemployment rates and a decrease in disposable income, with negative effects on overall economic growth.
This situation also involves Italian banks, which often own significant share portfolios and are exposed to stock market risks. A decline in the stock market can reduce the value of banks’ assets, negatively affecting their financial stability and ability to lend. This, in turn, can limit access to credit for businesses and consumers.
Consequences on mortgages
It is therefore no coincidence that the decline in Piazza Affari is accompanied by an increase in the spread between Italian and German government bonds (Bund). Since precisely an increase in the spread indicates a greater perception of the credit risk associated with Italian government bonds, which can lead to an increase in financing costs for the Italian government and further pressure on public debt.
The increase in the spread and yield of BTPs has in fact a direct impact on mortgage interest rates. In a context of rising interest rates, those with an adjustable rate mortgage could see an increase in monthly payments. New fixed rate mortgages may also be offered at less favorable conditions than in the past.
For Italian families, this scenario in the long term can translate into a greater difficulty in accessing credit for the purchase of a house, or in an increase in monthly expenses for those who already have a current mortgage. This, in turn, can negatively affect the housing market, reducing demand for new housing.
Therefore, the negative opening of the Milan Stock Exchange and the increase in the spread between BTPs and German Bunds highlight a moment of tension on the Italian financial markets. The forecasts are not encouraging, with potential repercussions on the general economy and specifically on the mortgage sector. It will be crucial to monitor the evolution of these indicators in the coming days to better understand the long-term impact on Italian families and businesses.
