On May 29, 2018 (April 15, 2018 lunar calendar), the Italian financial marekt finally triggered a "nuclear explosion", and stocks and bonds fell together. Is the rain really coming? On Tuesday, May 29, 2018, Italy's "powder keg" was upgraded to a "nuclear explosion", triggering a double-kill of the country's stocks and bonds, a plunge in the euro, and Spain, the fourth largest economy in the euro zone, has also fallen into political turmoil recently. Coupled with the sharp rise of the US dollar, it caused panic in the global market. For a while, the market entered a state of emergency hedging. 1. Italian stocks and bonds double-kill On Tuesday, May 29, the Italian financial marekt finally triggered a "nuclear explosion", and stocks and bonds fell together. Italy's FTSE MIB index was five consecutive negative. Italy's FTSE MIB index tumbled as much as 3.7% in intraday trading on Tuesday, but then narrowed its losses to close down 2.7%. Treasury bonds fell sharply! Italian 10-year bond yields rose 51 basis points to break 3% for the first time since June 2014. You know, government bond yields and government bond prices are inversely related, and a sharp rise in yields means that government bond prices fell sharply. The exchange rate also plunged. Italy is a member of the European Union, and the euro exchange rate also suffered a massacre today. The euro fell 0.47% against the dollar in the day to 1.1570, the lowest level since August 2017. 2. The most immediate trigger: the political crisis. In the general election held in March 2018, the center-right alliance won 37.5% of the seats; the Five Star Movement won 32.2% of the seats; and the center-left alliance led by former Prime Minister Renzi won 23% of the seats. From a regional perspective, the election further tore apart Italian society: the Five Star Movement (yellow in the picture) swept across the south; the center-right alliance (blue in the picture) occupied the northern industrial towns, and the center-left alliance only won sporadic areas in the center. The center-right alliance split after the election. Former Prime Minister Silvio Berlusconi's "Forza Italia" (Forza Italia) withdrew from the coalition, and the far-right League Party led the coalition negotiations with the Five Star Movement. On the 21st, the two parties introduced Giuseppe Conte as the new prime minister, and was appointed by Italian President Mattarella. But Mattarella rejected Conte's nomination of Finance Minister Savona, and Conte announced that he would give up his efforts to form a cabinet. Italian politics is deadlocked. President Mattarella proposed that if the formation of a cabinet continues to delay the "difficult labor", he will form a temporary transitional government and resume the general election around August this year. Major Italian media are pessimistic about the prospect of the crisis. Public opinion generally believes that if the general election is reopened, the populist sentiment in favor of the Five Star Movement and far-right parties may be even higher. The general election in August this year may evolve into an Italian "Brexit" referendum. Some analysts say that the current Italian political situation is so chaotic that it is actually a struggle between Brexiters and Remainers. Both parties in the cabinet belong to populist-leaning parties, which has raised market concerns about the uncertainty of future populist-leaning coalition government policies and the risk of relations with the European Union. The Five Star Movement and the League may consider: (1) asking the European Central Bank to exempt the 250 billion euros of Italian government bonds purchased by QE; renegotiating Italy's financial contribution to the European Union budget; (2) seeking further tax cuts, higher welfare payments for the poor, and an end to the 2011 pension reform that raised the retirement age; (3) seeking treaty changes to allow member states to exit the euro zone. The first of the above draft could worsen the relationship between the new Italian government and the European Union and the European Central Bank, the second measure would further widen the fiscal deficit and possibly exacerbate the still high government debt problem, and the last item The possibility of leaving the euro zone is the most feared scenario for the market, but the Five Star Movement and the League Party have denied this in a statement. 3. Internal causes: economic downturn, high debt Italy's economic problems are complex. At present, Italy's government debt is as high as 132% of GDP, second only to Greece and the second largest in the euro area; current government spending, pension spending is the largest, accounting for 16% of GDP; unemployment is as high as 11%, the highest in the euro area; total bank non-performing loans exceed 300 billion euros, accounting for about 30% of the euro area's banking bad loans. Since 2008, Italy's economy has recovered, but growth has been sluggish. Its total economy is about 6% smaller than it was a decade ago. It is one of the few countries in the OECD that has not returned to the level of economic output before the financial crisis. Unemployment has been high for a long time. Many people are dissatisfied with the state of the economy; at the same time, a large number of refugees are pouring in, and the government is also trying to cut benefits and use taxpayer money to rescue refugees. Under this situation, the large number of refugee quotas allocated to Italy by the European Union has seriously affected the country's social security, welfare distribution, and employment opportunities, and exacerbated local residents' dissatisfaction with refugees crowding out insufficient government funds and job opportunities. These factors have led to a significant decrease in people's confidence in traditional political parties and fueled the development of populist parties. At the same time, the demonstration effect of Brexit will further fuel the forces of populism in Italy and increase political uncertainty. As the global monetary policy tightens the margin, market interest rates will gradually rise, which will increase the financing cost of Italy, further highlight the debt problem, and damage the economic growth that has begun to pick up. 4. The biggest external reason: the Federal Reserve shrinks its balance sheet, interest rate hikes The Federal Reserve shrinks its balance sheet, and at the beginning of the interest rate hike, the frog is boiled in warm water, everyone will not feel hot, and when it is hot, it is too late. Since 2016, the Federal Reserve has raised interest rates 6 times, entering the highly dangerous red zone. If it continues to raise interest rates, there will be high debt, high deficit, and high bubble "three high" countries that will be unlucky. This has led to the return of global funds to the United States, allowing Italy to get less liquidity. The latest data show that the dollar index once touched the 95 mark, setting a new high for six and a half months. In the past, when the dollar was loose, the global bubble was obvious. At this time, it is better for countries like Italy to borrow money after all. Now that the dollar index is climbing up, it has reached 95, which is equivalent to the Americans helping the world deleverage. Looking at history, every round of fluctuations in the dollar cycle, every time the dollar index strengthens above 95, it is a ransacking of the global market, and a large wave of countries have collapsed! In the history of Japan's collapse and the Asian financial crisis, the dollar index has reached 95. This year is no exception, and it will be repeated. It's just that this time is more serious, involving more countries. Not long ago, the currencies of Argentina and Turkey collapsed, plummeting all the way, and eventually raising interest rates sharply, but they failed to save. 5. Moody's put it on the downgrade watch list. Before the new populist government in Italy took office, it was directly "threatened and warned". Moody's warned in a statement on Friday that Italy would be downgraded from its current Baa2 rating (the second-lowest in Moody's investment grade) to Baa3 (still investment grade), and possibly even junk status, because the new coalition agreement lacks fiscal constraints and could delay or overturn important reforms such as pension reform. Moody's also said that although the final coalition agreement has been revised, it will still lead to a weaker fiscal position in the future because it "does not offer the prospect of further fiscal consolidation", expensive tax reform and fiscal spending measures, and there is no clear plan for where the money will come from. However, Moody's is only a verbal warning for now, and will only take substantive action after reviewing the new policies implemented by the new government. Moody's pointed out that Italy's pension spending is already close to 16% of GDP, one of the highest proportions of any developed economy. Italy's new government still plans to increase fiscal spending, which has unnerved financial marekts. 6. Spain is also in crisis. The bad news in Spain is far from over. Spanish Prime Minister Mariano Rajoy will face a vote of confidence on Friday, and the conviction of dozens of people linked to his center-right People's Party on corruption charges threatens his position as prime minister. The Spanish parliament starts a vote of no confidence today. Spanish Prime Minister Mariano Rajoy will face a vote of no confidence on Friday. Spain's National Court recently handed down a verdict on the "Gütler case" of corruption. Twenty-nine people involved, including several former senior officials of the ruling People's Party, were sentenced to varying degrees of imprisonment and fines for tax evasion, money laundering, abuse of power and public funds. The main culprit in the case, businessperson Francisco Correa and former finance director of the People's Party, Luis Barcenas, were sentenced to 51 years and 33 years in prison, respectively. The People's Party was also fined 245,000 euros for illegal profits. The "Gütler case" is one of the worst power-money corruption cases in Spanish history. Correa is accused of building a network of collusion with government and business officials in many parts of Spain between 1999 and 2005, by providing kickbacks to officials in exchange for public project contracts. Spain's anti-corruption prosecutor began investigating the case in 2007 and filed a lawsuit in the national court in 2009. A number of former members of the People's Party, including former health minister Ana Mato, were involved in the case due to scandals such as receiving gifts and kickbacks, power and money transactions, and were investigated by the court. At present, the Spanish opposition Socialist Party of Workers has launched a motion of no confidence in the government, and the Civic Party has urged the government to hold early elections. Spanish Prime Minister Mariano Rajoy responded by saying that the motion of no confidence will affect the stability of Spain, damage the economic recovery, and is not in the interests of Spain. In recent years, corruption scandals have hit Spanish politics one after another. Recently, Cristina Simontes, a member of the People's Party and the former president of the Madrid region, announced her resignation due to the academic fraud scandal, and Eduardo Saprana, the former president of the Valencia region, was also arrested on suspicion of money laundering and other charges. This verdict will undoubtedly make the negative news-ridden People's Party even worse. Media analysts believe that successive corruption scandals will have an impact on Spain's local elections in 2019 and the general election in 2020. Due to the frequent corruption scandals, the reputation of the People's Party has been seriously affected, its support rate has been declining, and it has lost its absolute majority in the parliament. According to the latest polls, the opposition Civic Party and the "We Can" Party have gained popular response with anti-corruption as an important demand, and their support rate is likely to exceed that of the traditional parties, the Workers' Socialist Party and the People's Party. 7. The world has started a crazy risk-averse mode. Global stock markets have plummeted: Italy is not the only country that has plummeted. The whole of Europe is in a miserable state, and US stocks have not been spared. The decline in risk assets has also caused gold to rise to $1,306.59/ounce, breaking through the 1,300 mark. At present, gold's gains have narrowed, falling back below the 1,300 mark. Political crises have also detonated globally. Markets have fallen into panic mode. Investors have shunned the securities of non-core economies in the euro zone and flocked to US Treasury bonds for safety. 8. Or heading for another major financial crisis. According to Bloomberg, George Soros said that the surge in the dollar and capital flight from emerging markets could lead to another major financial crisis, and warned that the existential threat of the European Union is coming. Speaking in Paris on Tuesday, Mr. Soros said the collapse of the nuclear deal with Iran and the disruption of the transatlantic alliance between the European Union and the US over trade and other disputes were bound to have a negative impact on the European economy and cause other chaos. "We may be heading for another major financial crisis," he said. He went on to say that everything that could go wrong went wrong, including the refugee crisis, austerity, populists gaining political power. He also sharply criticized Brexit, saying it could lead to the "territorial disintegration" of the European Union. He argued that "Europe is in an existential crisis" is no longer a rhetoric, but a cruel reality. According to the Financial Times, Soros believes that reliance on austerity, despite its initial role, has damaged the euro and is exacerbating the crisis in Europe. He said Trump's withdrawal from the Iran nuclear deal and threats to transatlantic trade relations would hurt the European economy, especially Germany's.