How to Trade the Italian Banking Meltdown

Let’s talk commodities…

Brent crude, the international benchmark, is trading at US$50.60 per barrel. It’s up 81% from the low of US$27.83 per barrel on 20 January. West Texas Intermediate (WTI), also known as US crude, is trading at US$49.21 per barrel. It’s up 88.9% from the low of US$26.05 per barrel on 2 February.

When crude was trading at roughly US$50 per barrel on 6 June, I warned that it wasn’t as strong as it appeared.

My bearish view remains…

WTI crude closed lower on a monthly basis in June. With May being a higher closing, it warns that a reversal of fortune could be on the cards. The US dollar and US rig count are starting to surge, which should start putting pressure on the crude price soon. If WTI starts to crash harder, Brent should follow. I’ll talk more about oil this week.

With punters dazed and confused, gold is performing much better. The yellow metal stands at US$1,340.94 per ounce — a tad below last month’s high of US$1,360. Will the dream run continue? Anything is possible.

With plenty to talk about worldwide, let’s turn to Europe today…

A major financial meltdown looms

Prior to the Brexit, George Soros was championing for a Bremain vote. Soros became a billionaire by betting against the pound in 1992. He told The Guardian, ‘That after a Brexit vote the pound would fall by at least 15% and possibly more than 20%.

Unfortunately, the billionaire didn’t hedge his bets. Rather than going short, Soro’s was buying the British Pound before the shock decision. It cost him a fortune!

The pound got smashed on the news, recording the worst ever single-day drop for the currency. At one point, it fell by nearly 10% to US$1.33 — a 31-year low. In comparison, the pound fell 4% on September 16, 1992 — the day that Soros became famous. By the end of the month, the sterling was down about 15%.

Following the vote, with the pound still in freefall, Soros wrote on the Project Syndicate website, ‘the catastrophic scenario that many feared has materialized, making the disintegration of the EU practically irreversible.’

It’s clear that the unwinding of the ‘European Union’ — an undemocratic and unelected bureaucracy — is looming. According to the Sydney Morning Herald on Friday,

Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Brussels.

“This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent,” the billionaire investor said on Thursday.

As I wrote at length last week, by voting to leave the European Union, Britain has regained its sovereignty. Now eight more countries who have also had enough want to hold referendums to exit the EU. France, Holland, Italy, Austria, Finland, Hungary, Portugal, and Slovakia could all leave.

The story isn’t getting any better for the elites…

If you haven’t heard, Austria is now going back to the polls. The Constitutional Court ruled — in other words — that the presidential vote was rigged. According to the BBC on Friday,

Austria’s highest court has annulled the result of the presidential election narrowly lost by the candidate of the far-right Freedom Party.

The party had challenged the result, saying that postal votes had been illegally and improperly handled.

The Freedom Party candidate, Norbert Hofer, lost the election to the former leader of the Greens, Alexander Van der Bellen, by just 30,863 votes or less than one percentage point.

The election will now be re-run, which spells trouble for the European Union. After Britain voted to leave the EU, Norbert Hofer said that he will propose an Austrian vote to leave ‘within a year’. The Freedom Party’s leader is disgusted with the centralisation of political power in Brussels. On this note, the Sydney Morning Herald reported,

The euro region has lagged behind other regions in the global recovery, following the last financial crisis, “because of restrictive fiscal policies; now it has to contend with an impending slowdown”, Mr Soros said. “The orthodoxy of German policy makers stands in the way of the only effective response: having a euro-zone budget that could adopt counter-cyclical policies.”

In other words, Soros believes that the German leaders have become dictators. This threatens the EU’s existence.

It makes sense…

German leader Angela Merkel, holding most of the decision making weight in Europe, is solely responsible for the refugee problem. Without her blessing, the refugee invasion would have never happened. Merkel’s decision came after she had lost popularity in her country, following her hard stance on Greece in the Eurozone last year.

With huge dissatisfaction rising against the EU’s dictatorship and Germany’s political influence, anti-EU governments should start springing up throughout Europe. This should play out over the months ahead, heading into next year. When this happens, we could see a massive sell-off in the euro, and a European banking system meltdown.

The writing is already on the wall…

Italian Banks

Italy’s stock market has been a rollercoaster ride this year. Italian banks have lost more than 50% of their market capitalisation. You can see this on the chart below.

FTSE Italia All-Share Banks Index
Source: Bloomberg
Click to enlarge

The Italian banking system is a nightmare. And some bank share prices have dropped by nearly 75% from their peaks. According to Bloomberg,

Italian banks, hurt by 360 billion euros of non-performing loans, sluggish economic growth and record-low interest rates, are under pressure to clean up their balance sheets and restore investor confidence. The country was among the hardest hit by the [Brexit] that wiped $2.5 trillion from global equity values, with some of Italy’s largest banks dropping more than 20 percent.

That is, indeed, a 20% share price drop in one day.

Following a huge amount of devastation across the Italian banking sector, the European Commission granted a 150 billion euro bailout over the weekend.

The conclusion from all of the above is that a financial avalanche waiting to happen. While governments are kicking the can down the road now, it can only go on for so long. Eventually the market — which is much smarter than government — runs out of patience, and then everything starts blowing up.

It’s the financial meltdown hits, resource — alongside stocks, precious metals, property, and bonds — should get a lot cheaper. In my view, everything should pull back during the initial stages of the panic. Meanwhile, the US dollar should surge — it’s the only true global safe haven. When this happens, I plan to recommend the best resource stocks on offer. This should position you strongly for the next phase of the commodities bull market.

In the meantime, I plan to recommend the best speculative resource stocks. These stocks have made my readers huge gains this year, which I discussed in my FREE report here. I have plenty of exciting speculative stocks on my watchlist.

In my view, there’s no better place to make big gains than in resource stocks this year. Both in quick speculations, and after the crash with longer term investments. That’s why I wrote the free report, ‘Three ‘Bounce-Back Mining Belters’ to Buy NOW’, published recently.

Implementing my top-down approach, I’ve found three resource stocks that could make you massive profits in the months ahead. This is despite the market conditions.

To get your FREE report today, click here.


Jason Stevenson,
Resources Analyst, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Money Morning Australia