Market Brief: panic over?

When I left the office on Tuesday evening it was all doom and gloom with Italian 2-year government bond yields having risen a whopping 184bp. 

Today's data releases
  Key levels
09:30 UK mortgage approvals   Support Resistance
10:00 EU unemployment rate & CPI GBP/USD 1.3200 1.3450
13:30 US jobless claims GBP/EUR 1.1300 1.1600
14:45 US Chicago PMI      

Market overview

I was out of the office all day yesterday in meeting - what a difference a day makes. I am not just saying this because it was nice to have a break from staring at screens all day (ah, the life of those who work on a trading floor!) but really because of developments in Italy changed significantly. When I left the office on Tuesday evening it was all doom and gloom with Italian 2-year government bond yields having risen a whopping 184bps. Yesterday Italian markets (and markets in general) rebounded in style. Italian bonds rallied with the 2-year bonds yields declining 107bp, the 10-year bond yields falling 29bp, whilst the FTSE MIB gained 2.1%... Panic over!? Well, let’s wait and see!
 
So what exactly changed whilst I toured Liverpool, Manchester and Leeds? Italian markets rebounded yesterday as hope rose that another round of elections might be avoided. Developments yesterday saw the President and his candidate for Prime Minister Carlo Cottarelli agree to temporarily put on hold discussions for an interim administration while they gave 5 Star and the League a renewed attempt at forming a government. 5 Star’s Di Maio appeared open to renewing attempts at forming a government with the League. Key to that outcome was an acceptance to nominate a finance minister that would not seek to take Italy out of the euro (recall that the parties had hoped that the President would approve the appointment of 81-year-old Eurosceptic economist Paolo Savona who had been put forward to be the nation's next finance minister).
 
However the League were cooler on the proposition, with Salvini himself (the man who heads up League) seemingly ruling it out yesterday morning, before suggesting in the afternoon that he could form a government with either 5 Star or the Centre-Right Bloc. One factor that may be at play here, is that Salvini is secretly playing for another election given the League’s rise in the opinion polls since March’s election and a hope that he can capture power on his own or at least jointly with a party with similar ideologies. Indeed one story this morning has suggested that the League and the right-wing Brothers of Italy could run on a joint ticket at the next election.
 
Therefore markets are set to remain in wait and see mode today as they await comments from the main populist parties. One further point of note is that if a 29 July election were to be called as has been reported this week, it would have to be called today, given that there is a 60 day period between an election’s call and the actual vote. Maybe the ‘Panic Over’ sentiment might be premature! Watch this space.
 
In Spain, worth keeping an eye on developments there too - Prime Minister Mariano Rajoy faces a decisive debate in parliament today as the Socialist opposition seeks support to oust him. Tomorrow there will be a vote, following a court ruling on corruption within Rajoy’s centre-right Popular Party (PP). The debate has been called by Socialist Party (PSOE) leader Pedro Sánchez, who would become PM if tomorrow’s vote goes against Rajoy. The PP is a minority government with 134 of the 350 seat Cortes (plus a handful of allies) and may have the support of centrist party Ciudadanos (32 seats) on the grounds that the latter is insisting on immediate elections if the motion of no confidence is passed. This means that Sánchez would need the support of virtually every other deputy to topple Rajoy, including Catalan and Basque nationalists, which reports overnight suggest he has. We note that this is a very different situation from Italy, bearing in mind that none of the major parties in Spain is calling for a confrontation with the EU, let alone an exit from the euro.
 
In other news, Germany, Spain and France inflation numbers for May have been released and we’ve seen a rebound in inflation from all three. Domestically, GfK Consumer Confidence was up 2 points, Nationwide house prices were slightly down but interestingly OECD has pushed up its UK growth forecast slightly to 1.4% in 2018 (having been previously very bearish).  In the US the Beige book overnight pointed to an economy continues to expand at a decent pace, so nothing new there. More interestingly it seems that the North Korean Summit might be back on again (this really is becoming a bit of a joke, but then again, should we surprised!?) As for the day ahead, all eyes will remain on Southern Europe, however there will be a few data points to watch out for too – UK Mortgage Approvals (09.30), EU Inflation (10.00) and US Initial Jobless Claims and Chicago PMI at 13.30 and 14.45 respectively. 

Thought of the day

There are plenty of people I know (myself included) who are guilty of jumping from one ‘superfood’ fad to the next as soon a new study or newspaper article is published touting their various benefits. The latest craze in the ‘superfood’ sector however may have just nipped this in the bud for me – how does a cockroach milk latte sound? While it may not sound as appealing as other non-dairy milk options like soy or almond, a study recently shared in a Marie Claire (my girlfriends issue of course) claims scientists have found that cockroach milk could contain four times as much protein as cow’s milk. It is also said to be packed with essential amino acids and is among the most nutritious and highly caloric substances on the planet. It’s not all good news mind, the milk can only be found in the Pacific Beetle cockroach, native to Hawaii, and obtaining it is said to be a very laborious not particularly pleasant process. I personally can’t see it catching on, but then again I didn’t think a café exclusively selling bowls of cereal would either - Shoreditch never fails to surprise me. Talking of trends, there are a number of new ones beginning to take grip of the FX markets, including political developments in Europe and a global risk off sentiment. To discuss these in more detail give the dealing room a call on 020 7597 4000 today.

Discover how our Treasury team can help your business

Live FX graph

Live FX rates

  • View important information

    This Market Commentary is provided for information purposes only and should not be construed as an offer, or a solicitation of an offer, to buy or sell any related financial instruments. This commentary has not been prepared in accordance with legal requirements designed to promote independent investment research. The information contained in this commentary has been compiled from sources believed to be reliable but no representation or warranty, implied or not, is provided in relation to its accuracy, suitability or completeness. Any opinions, forecasts or estimates constitute a judgement as at the date of this report and do not necessarily reflect the view of Investec Bank plc ("Investec"), its subsidiaries or affiliates. This commentary does not have regard to the specific investment objectives, financial circumstances or particular needs of any recipient and it should not be regarded as a substitute for the exercise of investors' own judgement. Investors should seek their own financial, tax, legal and regulatory advice regarding the appropriateness or otherwise of investing in any investment strategies and should understand that past performance is not a guide to future performance and the value of any investments may fall as well as rise.This commentary is confidential and may not be disclosed or distributed to any third party without the prior written consent of Investec. Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and a member of the London Stock Exchange. Registered office 2 Gresham Street, London, EC2V 7QP. Investec Bank plc 2018.