A latte uncertainty
05/31/18

While traders in the US were enjoying a long Memorial Day weekend, those in other parts of the globe, and especially in Europe, were dealing with the “Italian situation”.

In a nutshell: In Italy’s March elections, two anti-European Union (EU) populist political parties (the Five Star Movement and Lega Nord) won a majority in parliament, giving them the right to form a government. However, on Tuesday Italian president Sergio Mattarella vetoed the coalition’s candidate for finance minister (fierce euro critic Paolo Savona), which meant no government—which means new elections, most likely this fall.1

While that may sound like small gnocchi in the grand scheme of things, consider:

● Italy is the Eurozone’s third-largest economy, and a founding Eurozone member.

● The Eurozone is the world’s second-largest economy.2

●A populist Italian government may decide to pull out of the Eurozone—presumably, the very fear that led the Italian president to nix Savona’s nomination.

●Already hit by Britain’s exit from the EU, many people worry about the ability of the Eurozone and its currency to survive the departure of a key member.

The proof of these worries was in the pudding on Tuesday: Global equity markets around the globe took a dive, the euro dropped to its lowest level in 10 months, Italian bond yields spiked, and no less than George Soros warned that Europe was facing “existential danger.”3

Many Italian stocks, of course, took a pounding, including automaker Fiat-Chrysler (FCAU), which fell more than 4% (and around 7.5% from last Wednesday), broke support, and closed at $20.84—its lowest level in almost two months:

Fiat-Chrysler (FCAU), 3/21/18 – 5/30/18. Fiat-Chrysler (FCAU) daily chart

Source: OptionsHouse

But as is usually the case when news blindsides the market, you have to ask, was the move overdone?

Some traders seemed to think so yesterday, bidding up FCAU shares more than 6% intraday. The implications and risks of the Italian situation are real, but even a worst-case scenario—an anti-EU Italian government—doesn’t automatically portend an exit from the Eurozone, a collapse of the common currency, and global financial contagion. The outcome is still months from being decided, at any rate.

Despite its recent share drop, Fiat-Chrysler—an American as well as Italian automaker, one must remember—has had a great run over the past couple of years, with its shares gaining around 300% since mid-2016:

Fiat-Chrysler (FCAU), 3/14/16 – 5/30/18. Fiat-Chrysler (FCAU) price chart

Source: OptionsHouse

The company has been in the headlines lately for several of its initiatives—deciding to kill diesel car production by 2022, turning away from making mass-market cars for the Italian market, among others—and the market is eagerly awaiting outgoing CEO Sergio Marchionne’s presentation on Friday, which is expected to outline the firm’s vision for electric and hybrid cars.4 In January Fiat-Chrysler announced that it expected to eclipse Ford (F) in profitability this year, after its 2017 net profit nearly doubled from 2016.5

Given the larger issues at play, experienced traders would keep positions on a relatively short leash, but if the market likes what it hears on Friday, some traders may look for FCAU shares to make a run at their April or January highs. On the downside, the longer-term chart shows the March-April lows (around $19.60) could be a possible near-term support level in the event of a break below Tuesday’s low.

And lest anyone think a potential rally of less than $3 from yesterday’s levels is a yawner, consider that on a percentage basis, that amounts to a roughly 12% gain—equivalent to a $42 bump in Netflix (NFLX).

 

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1 The Guardian. Italy at risk of new financial crisis in wake of coalition's collapse. 5/29/18.

2 Bloomberg. China's Economy to Overtake Euro Zone This Year. 3/6/18.

3 Bloomberg.com. Soros Sees New Global Financial Crisis Brewing, EU Under Threat. 5/29/18.

4 Financial Times. Fiat Chrysler profits set to outpace Ford in 2018. 1/25/18.

5 Reuters. Fiat Chrysler investors want electric road map in CEO's swan song. 5/29/18.