Italy FTSE MIB index analysis: Draghi out, worst yet to come? Ten years after rescuing the euro with the iconic "Whatever it takes", Mario Draghi resigns as Italian Prime Minister, as the political parties that formed his majority no longer backed him.
The uncertainty surrounding the upcoming general election reigns supreme, and the political crisis in Italy risks putting further downward pressure on the Italian FTSE MIB ( IT40 ) index due to widening yield spread between Italian (BTP) and German Bunds.
The BTP-Bund spread, measured as yield difference between IT10Y and DE10Y is now at 2.34 percent (or 234 basis points). Historically, the FTSE MIB index has had a strong and inverse link with the yield spread between Italy and Germany. The FTSE MIB index saw increased volatility as a result of BTP-Bund spread spikes, since they reflect a gauge of credit conditions and country risk in Italy.
Draghi's departure along with the announcement of early elections with populist parties on the rise, could now push the BTP-Bund spread above 300 basis points, a level that has previously raised warning bells and resulted in significant sell-off in the FTSE MIB index.
Technically, the major trend remains bearish, and the 14-day RSI has been trading below the 50 level for the previous month and a half. However, the momentum indicator is not showing oversold conditions.
If the BTP-Bund spread increases beyond 300 basis points, a level that has previously raised concerns in Italy, the FTSE MIB might suffer a more serious selloff in the coming weeks, possibly breaking below the 20.000 mark.
