Cottarelli

30 May 2020

Market Brief: Italy in crisis

Kiran Russell

Dealing team

The political crisis in Italy intensified last night after President Mattarella asked Carlo Cottarelli, a former IMF official, to form a technocratic government.

Today's data releases
  Key levels
10.30 EZ ECB's Mersch speaks   Support Resistance
15.00 US consumer confidence GBP/USD 1.3220 1.3451
15.30 US Dallas Fed manufacturing index GBR/EUR 1.1306 1.600

Market overview

Welcome back from the long weekend. Hope you all enjoyed the break, lapped up some sun and are now all set for the week ahead. I always find short weeks difficult – rather than just accepting the fact that we have four days to get our work done this week, somehow it always feels like you still have to cram in 5 days' work!

 

Talking of work, in Italy there seems to be a lot work to be done; the political crisis intensified last night after President Mattarella asked Carlo Cottarelli, a former IMF official, to form a technocratic government. Mattarella’s appointment was controversial, but even more controversial was his veto of the finance minister Paolo Savona, nominated by the anti-establishment Five Star Movement and the far-right Northern League, known for his anti-EU beliefs. This sparked outrage from political parties who have been trying to form an administration. EURUSD has plummeted lower and the spread between Italian and German 10 year yields widened to more than 230 basis points by the close, yesterday, its highest since the 2013 sovereign debt crisis. A further signal that markets are jittery is that we’ve seen the Yen climb to a three-week high against the USD and rally against all of its major peers as the Italian political impasse boosts demand for haven assets.

 

Well what next for Italy, one might ask? It seems very unlikely that Cottarelli will win a vote of confidence in parliament, which implies a fresh set of elections will follow soon, perhaps as early as September. The danger here is that these events will turn the election on a de facto poll on Euro membership, even though constitutionally it is very difficult for Italy to leave.

 

In other news, Spain are having political worries of their own too. After a corruption case ruling last week Spain’s Prime Minister Mariano Rajoy is set to face a vote of no confidence this Friday. Perhaps the only silver lining for the Euro this week is that ECB sources were quoted last week by Reuters as seeing an increase in the inflation outlook. This implies they may be ready to announce a plan to end QE as early as next month.

 

Closer to home, a Bank of England spokesman refuted suggestions of a rift between the central bank and the U.K. Treasury after a report in the Financial Times said the institutions are at “loggerheads” over the future of City of London regulations after Brexit. The USD continues to gain ground against the Pound, with GBPUSD dipping into the 1.32s this morning (a massive 11 cents lower than the post-Brexit highs posted last month.)

 

As for the data points of Friday (yes that seems a long time ago now!) the UK GDP numbers for Q1 were unchanged and the University of Michigan sentiment posted 98 vs 98.8 expected. With no data releases out in the UK today, the day ahead will be dominated by the Italian and Spanish news and takeaways from ECB speakers. Stateside, Consumer confidence numbers at 3pm will be worth keeping an eye on too.

Thought of the day

Instead of writing a thought this morning about the Champions League final and Gareth Bale’s heroics, I thought I would write one about a genuine hero who emerged over the weekend. Mamoudou Gassama, dubbed the ‘Spiderman’, after he scaled a building four floors to rescue a small boy dangling from a balcony in Paris. His bravery won widespread praise and even gained him a meeting at the Elysee Palace where President Macron said he would be made a naturalised citizen, gave him a medal for courage and said that he would also be offered a role in the fire service. Whilst we do not claim to be heroes and we cannot put an end to Sterling’s struggles, what we can do, is help you develop a hedging strategy that suits your company’s risk appetite. Our array of products and expert knowledge will provide the right solution for your business, speak with your FX dealer today on 0800 055 6339 to discuss the different approaches FX strategy. 

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