This is Giorgia Meloni’s time in the sun. I hope she enjoys it.
The pasta is about to hit the fan.
Which will lead the dollar to rally against the euro. Some more. And which gives me Step #6 in my Special Report: 7 Steps to Take Now to Protect Your Portfolio While You Still Reap Market Gains
Step #6 in my strategy for protection and profit for the rest of 2024 (part of a Special Report on my subscription JubakAM.com site) is Buy the Invesco DB US Dollar Bullish ETF (UUP).
The G7 Summit of the world’s dominant economies was held from June 13-15, 2024, in Borgo Egnazia, Apulia, Italy.
Since Italy holds the rotating G7 Presidency for 2024 that meant Italian Prime Minister Giorgia Meloni hosted the summit, which focused on Russia’s war against Ukraine, climate change and development in Africa, the situation in the Middle East, migration, the Indo-Pacific region and economic security, and artificial intelligence.
The right-wing, neo-fascist politician was well positioned to shine at the summit. She’s won around a skeptical Joe Biden and earned the grudging respect of Olaf Scholz and Emmanuel Macron. While the premiers of France and Germany were humbled by the European elections, two years after coming to power as leader of the far-right Brothers of Italy party, Meloni increased her party’s popular share of the vote in Sunday’s European election. And she used her role as host of the meeting to raise her visibility on the global stage by arranging a visit from the Pope and a photo op with India’s Modi.
But a period when bond investors were receptive to buying Italian debt looks to be coming to an end. Italy’s debt problem, already horrendous, is getting worse, and Meloni’s right-wing populist government isn’t in any position to delver on the reforms the European Central Bank is demanding as the price for continuing to support Italy’ bonds. A crisis for italy, and for the Euro looms just after the G7 summit is over.
Italy’s debt problem is bad. That’s no surprise. But the recent deterioration puts the country in danger of losing the support from the European Central Bank that has supported Italy’s bond market.
Italy has one of the highest public debt levels in the world, currently around 144% of GDP, which is the second highest in the Eurozone after Greece. Italy’s economic growth has been stagnant for over a decade, with per capita income barely increasing since the country joined the euro in 1999. All three factors that could improve Italy’s debt situation–achieving a primary budget surpluses, falling interest rates, and faster economic growth–have moved against Italy. The government is running primary budget deficits, borrowing costs don’t look to get much relief from meagre ECB hikes cuts, and the economy is at risk of recession. Italy’s debt servicing costs are projected to increase substantially as it needs to refinance over €200 billion of debt annually at what look to be higher interest rates–even if the ECB cuts its benchmark rate.
The European Central Bank had previously supported Italy by purchasing its bonds, but the ECB has now terminated those programs because of the end of Covid emergency financial rules and in the face of Italy’s obvious lack of progress on meeting budget goals. That leaves Italy more reliant on financial markets to fund itself. Securing continued disbursements of EU recovery funds is critical for supporting investment and growth in Italy, but progress on reform milestones has been slow under the new (and, to be fair, old) government. The populist stance of the Meloni government makes delivering budget cuts politically fraught, especially since, whatever it’s international profile, the government isn’t all that popular at home.
The Italian government will need to run primary budget surpluses (excluding interest payments) averaging around 1.5% of GDP from 2024 to 2027 to adhere to EU budget rules that have been reinstated with the end of the Covid-19 emergency. Ain’t gonna happen. This would require a substantial fiscal adjustment from the projected primary deficit of 3.4% of GDP in 2023. Italy’s budget deficit is projected to remain above the EU’s 3% of GDP limit until at least 2026, based on the government’s own forecasts, at 5.3% of GDP in 2023, 4.3% in 2024, and 3.6% in 2025 before potentially falling below 3% in 2026. That’s not fast enough to remain eligible for ECB support programs like the Transmission Protection Instrument (TPI).
There’s definitely fuel for another Euro currency crisis here. Especially when you add in the extreme political weakness of EuroZone governments.
All this means continued strength for the dollar against the euro and other currencies.
My suggestion is to Buy the Invesco DB US Dollar Bullish ETF (UUP). The ETF was already up 7.01% for 2024 as of Friday, June 14, so I don’t think you’ll see a double-digit gain from here. But 4% or 5% is a reasonable expectation over the remainder of 2024. Which compares comfortably with projections for the Standard & Poor’s 500 for the rest of the year. With less risk and decent portfolio diversification.
The Invesco Dollar ETF has a 0.75% expense ratio and a recent yield of 6.09%.
On Monday, June 17, I will add this to my Jubak’s Picks Portfolio.
Which leaves just a final seventh step for this Special Report on my subscription JubakAM.com site.
