Italian political concerns weigh heavily on the Euro


Italian markets remained under pressure yesterday afternoon, with the 10yr yield spread widening 18bp on the day to 148bp, whilst the FTSE MIB was down 2¼ %.

Latest Rates
1.1436 1.7951 1.7254 1.3539
149.53 10.6089 16.8292 1.1822 0.8744
Investec currency forecasts as at 1 May 2018
Q2'18 Q3'18 Q4'18 Q1'18
GBP/USD 1.38 1.39 1.40 1.41
GBP/EUR 1.14 1.15 1.15 1.14
Data releases
10:00 EU Construction output             
13:00 EU ECB’s Constancio speaks
13:30 US Initial Claims + Philly Fed                           
15:45 US FED’s Kashkari speaks
Key Levels
1.3458 1.3657
1.1306 1.1478

Market overview

Italian markets remained under pressure yesterday afternoon, with the 10yr yield spread widening 18bp on the day to 148bp, whilst the FTSE MIB was down 2¼ %. There has been little in the way of concrete news overnight with discussion continuing. 5 Star’s Di Maio and the League’s Salvini are likely to hold further talks today. Reportedly 90% of policy discussions are now complete, with the remaining issues focusing on immigration and a few others. This suggests that they have come to an agreement over key topics such as fiscal policy and Europe. What will worry markets is what they have agreed upon in terms of key policies such as 5 Star’s ‘citizens wage’ and the League’s 15% flat tax rate. Not to mention their joint position on the Euro and Europe. Reports this morning have suggested that the League and 5 Star have dropped a controversial policy of requesting a €250bn write-off of Italian bonds held by the ECB. There is still no official word on who might be proposed as Prime Minister, although the Italian press have reported that the PM will come from 5 Star, with Di Maio one of five names under consideration. Market nervousness is likely to continue as investors await a final agreement and detail on the direction the new government might take.

The Dollar firmed as the Euro retreated hitting a five-month low on the above political developments from Italy. The Dollar index against a basket of six major currencies dipped 0.2 percent to 93.180 DXY but was in close reach of 93.632, its highest since Dec.19. GBPEUR moved to the mid 1.1450’s providing Sterling with some well needed rest bite. GBPUSD hit the 1.3458 support line yesterday and rebounded back above 1.3500, the pound rose 0.5 percent after the Telegraph reported that Britain will tell Brussels it is prepared to stay in the European Union's customs union for an extended period beyond the end of the transition period. Prime Minister Theresa May’s top ministers involved in Brexit strategy agreed this week on a backstop plan to avoid a hard Irish border, having rejected earlier proposals from the EU. Britain is set to leave the EU in March next year although it has secured a transitional arrangement to keep its trade ties with the bloc unchanged until the end of 2020, as long as a permanent deal can also be reached in the coming months. All eyes are on June’s EU summit, where Theresa May will be hopeful to make clear progress as time is not on her side.

Yesterday EU and German inflation numbers came in in line with expectations, holding firm 1.2% (YoY) and 1.6% (YoY) respectively. Unfortunately due to the Italian political uncertainty these data releases did little to stop the Euro’s woes. Overnight the Australian economy added 22.6k new jobs, slightly ahead of the 20k consensus forecast. Significantly, all the gains came from full-time jobs (+32.7k), partly offset by part-time jobs losses (-10.0k). This is in net contrast with the previous month’s set of results (in March, all the gains came from part-time jobs, +24.8k, offset by full time jobs losses,-19.9k).

The day ahead

This morning we have the release of Construction Output from the EU at 10am. Outgoing ECB Vice President Vitor Constancio is delivering closing remarks in Frankfurt followed by a speech at the macroprudential policy and research conference, organised by ECB. This afternoon we have weekly labour market data from the States, the Philidelphia manufacturing survey and FOMC members Kashkari and Kaplan speaking this evening.

Thought of the day

Most of the talk this weekend has been about the Royal wedding. However, many forget that the FA cup final also takes place on Saturday for the 147th time when Chelsea and Manchester United go head to head. Will Conte succeed in what could be his last ever game or will United’s parked bus stop the threat of Hazard et al, could this be the lowest viewing figures ever for an FA cup final! If your mind isn’t on football or weddings and you would like to discuss what’s happened to the pound over the last few weeks, please call the Investec Dealing Desk on 0800 055 6339.

latest commentary

  1. Migration deal over the line

    The world outside these four walls the big news is that EU leaders managed to come to an agreement in the early hours of the morning on how to deal with rescued migrants.

  2. New BoE member strikes cautious tone

    As luck would have it, when I hit shuffle on my Spotify this morning Mungo Jerry’s “In the Summertime” came on. 

  3. The big question: where's Boris?

    Is it a bird? Is it a plane? Well your second guess was close enough, it’s a 3rd runway for Heathrow.

  4. Crude Oil Prices Rally

    On the last trading day of the week, the most notable development in markets was a sharp lift in crude oil prices, with WTI and Brent rising 4.6% and 3.4%, respectively.

  5. BoE Set to Hold

    The pound inched higher yesterday afternoon as news broke Theresa May had managed to avoid a Tory rebellion and avoid defeat in Parliament over her flagship Brexit bill.