The Italian election results are finally over and, as expected, there is no strong majority to have a government. The political parties will work to find a coalition leaving probably some extra ripples in the Italian securities in the upcoming weeks.
In Numen we monitor tweets to have a sense of the crowd thinking on specific securities such as Italian Government Bonds or themes such as monetary policies or geopolitical risks. We built an AI-driven platform to convert millions of tweets into sentiment indicators. These indicators typically show positive sentiment when they are close to 1 and very negative sentiment when they are closed to -1, with good forecasting ability to spot big moves for short-to-medium term horizons in many asset classes.
We conducted a simple analysis highlighted in the graph to show what people think on the Italian government bonds1, the best proxy to assess the Italian risk, and to infer a potential relationship with BTP 10-year yield during the big moves from the q2 2017 until the election.
From q2 2017 until the beginning of q4 2017 the sentiment didn’t show big swings although the yield had moves of roughly 40bps first down and then up again. It hints the crowd was not really convinced on the 10-year BTP yield bullishness or bearishness.
It is quite interesting to see that the more we get closer to the Italian election day the more we see relevant swings in sentiment. The two big moves (roughly 50bps down and 40bps up both in q4 2017) were partially justified by the positive sentiment building up in q3 2017 and the negative sentiment building up in December 2017. What we often see across assets is that a positive relevant sentiment (ie values close to 1) is often predicting a positive big move in price or a negative move in yield like this case. The same holds for negative relevant sentiment, it might trigger a negative move in price or a positive move in yield.
In February the sentiment was quite negative, probably because of the instability newsflow related to the potential threat of five stars movement, the populist party, getting consensus in the latest polls. The BTP was trading within a very narrow range instead. Next weeks will be interesting to see if the crowd sentiment was right in predicting a potential upside move for the BTP yield. We don’t consider here the spread BTP-Bund, so the move might come as well from the German 10-year yield, which is likely given the German grand coalition might hint more government spending ahead and the ECB position might turn more hawkish than market expects.
Sentiment analysis can be a useful toolkit to understand macro markets for short-to-medium term trades or systematic strategies. However it must be combined with price action, fundamentals and positioning to get an overall sense of the risk-reward.
Marco Jean Aboav, Portfolio Manager
1There is no reference to a specific maturity, but more a general sentiment on the curve