Despite the de-escalation talk of the past two days, one of the key barometers of economic pain associated with the war is showing no relief.
Remember, we looked at this chart a couple of weeks ago.
Both the red and the blue lines show the key spread between Italian yields (Europe's most fiscally fragile major bond market) and German yields (the anchor). This spread represents the risk premium in Europe.
The red line is the 2022 period surrounding Russia's invasion of Ukraine. The blue line is the current period (18 trading days into the war). Everything to the right of the black vertical line is the market reaction to the war catalyst.
As you can see from the blue line, the risk premium continues to rise, albeit from a low base. But, importantly, it's been led by Italian 10-year yields that traded over 4% the past two days.
And 4% has significance.
The European sovereign debt markets started showing stress in the summer of 2022. And it was the sharp move above the 4% level in Italian yields that compelled the ECB to act — restarting QE (QE by a new name, the "Transmission Protection Instrument") to stabilize bond markets of the weak euro zone countries.
This is the place we've been watching for the signal that the market expectations are shifting from "short-term pain" to "long-term structural economic damage."
