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Italy ETF Walloped As 'Quitaly' Speculation Intensifies

ETF Professor

The iShares MSCI Italy ETF (NYSE: EWI) plunged Tuesday. EWI, the largest dedicated Italy exchange traded fund listed in the U.S., tumbled 5.82 percent on more than triple the average daily volume.

EWI's Tuesday tumult represents essentially all of the fund's year-to-date loss, but since the start of May, the ETF has rapidly entered a bear market, plunging more than 20 percent.

What Happened

During the darkest days of the European financial crisis, back when it appeared Greece would leave the eurozone, market participants frequently wondered what shoe would be next to drop. Italy was often the answer. It has taken a few years, but the region's third-largest economy behind Germany and France legitimately appears on the brink of leaving the eurozone.

“Whether it’s going to be called Itexit, Italexit or Quitaly, the prospect of Italy leaving the euro is fast becoming a topic of conversation, not just in the cafes of Rome’s piazzas, but all across the globe,” said Murray Gunn, head of research at Elliott Wave International. “The country’s populist coalition wanted to appoint a euroskeptic as finance minister, but the Italian president blocked the move."

Fresh elections could be next, and would be waged as a "de facto referendum" on Italy's euro membership, Gunn said.

Why It's Important

Yields on two-year Italian sovereign bonds jumped to the highest levels since 2013 Tuesday, and the bid-to-cover ration in a six-month note auction was the lowest in eight years, signaling investors are concerned about Italian debt.

"The Italy-German 10-year spread is at highest daily change on record and significantly worse than during the sovereign debt crisis in 2012,” Rareview Macro founder Neil Azous said in a note out Tuesday. “Sentiment has rapidly shifted to looking for reaction/guidance/help from European Central Bank officials.”

As Azous points out, some major Italian banks have to receive help or guidance from the ECB. That is problematic because Italian banks are not healthy and the financial services sector accounts for over a third of EWI's weight.

What's Next

For the wagerers out there, William Hill odds suggest the probability of Italy being the next country to leave the European Union is 2-1.

If Italy loses market access, the ECB, with its QE program, is powerless against a bond market sell-off,” said Azous. “The Public-Sector Purchase Program, the part that does the government bond buying, is conducted according to the ECB’s capital key, which means that the ECB cannot suddenly shift a big part of the purchases towards Italian government bonds.”

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