Xtrackers Europe ETF suffers largest outflows last week amid mounting EU-Italy tensions

Italy tensions

The Xtrackers MSCI Europe UCITS ETF (XIEE) suffered the largest outflows across all ETFs listed in Europe last week amid a number of concerns for the bloc including Brexit, ongoing weak growth and mounting tensions between the European Union and Italy.

According to data from Ultumus, XIEE saw $490m outflows in the week to 10 May and fell 2.7% over the same period.

Along with XIEE, the Deka DAX® UCITS ETF (EL4A) was also in the top 10 outflows suffering $143m redemptions, while the iShares MSCI Europe UCITS ETF EUR (IMEA) witnessed $107m outflows.

Investors appear to have been spooked by the latest developments in Italy, who are heading to the polls for the European elections on 26 May.

Deputy Prime Minister and League leader Matteo Salvini has threatened that Italy could ignore EU fiscal rules which state a country’s budget deficit should not exceed 3%.

Salvini added the government should be ready to push debt beyond 140% of GDP, in order to tackle unemployment. “Until we arrive at 5% unemployment, we will spend everything that we should and if someone in Brussels complains, that will not be our concern.”

Following his comments, Italian 10-year government bond yields jumped to two-month highs of 2.76%.

His counterpart, Five Star Movement leader Luigi Di Maio hit back, labelling Salvini’s comments as “pretty irresponsible”.

Mohammed Kazmi, portfolio manager at UBP, commented: “With Salvini’s League continuing to gain support in the polls, the market remains vigilant of the possibility of early elections to take advantage of this, especially given apparent rising tensions with Di Maio.

“Furthermore, budget concerns have also resurfaced following the European Commission’s 3.5% of GDP forecast for the deficit next year, to which Salvini has seemingly dismissed with his plans to still go ahead with VAT cuts, as well as his willingness to break EU fiscal rules.

“As such, we remain very cautious on BTPs currently, which is also due to the illiquidity of the market in risk-off scenarios which has often led to volatile and extreme moves in spreads, as highlighted last year.”

However, there was some positive news for the eurozone this week, after it was reported the German economy had expanded 0.4% in Q1 following two quarters of weak growth.

Nancy Curtin, CIO of Close Brothers Asset Management, said it is important for European Central Bank Mario Draghi not to “get complacent” despite the positive numbers.

“The eurozone is an export-led economy, and global trade is at its weakest in a decade,” Curtin continued. “Trade tensions continue to take centre stage for the world economy, looming as a circuit breaker to global recovery. Unless we reach resolution, the EU must be open to fiscal intervention to avoid a downturn.”

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