Morning Commentary: Italian Market Rout Infects the Eurozone

Foreign Exchange - Morning Commentary

Italian Market Rout Infects the Eurozone

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Italy’s new populist leaders are sticking to their campaign pledges of making expensive promises to their Italian electorate. This is coming loud and clear through the announcement of a projected budget deficit of 2.4% of GDP for 2019. While the budget deficit stays within the 3% limit set by the EU, it violates the requirement that highly indebted nations make a genuine effort to shrink their debt.
Italy's debt burden is already at 130% which is the second highest in the EZ after Greece.  This action potentially puts Italy in a position for a downgrade by the rating agencies and a potential clash with Brussels; it also, once again, puts the EZ project in potential jeopardy as Italy is the third largest EZ economy.
Markets reacted strongly today with Italian stocks down by 4.41% and Italian bond yields up by an amazing 35 bps today yielding 3.23%. The market’s reaction to the Italian budget has contaminated the rest of the market today exacerbated by it being Friday, month-end, and quarter end.
European stocks are all much weaker with Germany and Spain also down by 1.78%. EZ yields are down sharply and the reaction has sent the euro down to multi-week lows against the U.S. dollar and on many crosses. One only has to remember the Greek disaster from a few years ago and how that poisoned the EZ, the euro and the markets. This is just one more example of how economic nationalism is roiling the markets.
  • Adding to the woes for the euro today was the fact that EZ CPI YoY fell below expectations to 0.9% against expectations of a 1.1% print.
  • Germany posted a great jobs report today with unemployment claims dropping by 23,000 against expectations of a decline by 9,000. The UR fell from 5.2% to 5.1% which is a record low.
  • U.S. Personal Income rose by 0.3% (below consensus) and Personal Spending rose by 0.3% which met expectations. The key PCE deflator index fell from 2.3% to 2.2%. U.S. interest rates are lower on the session piggybacking off of the much weaker EZ yields.
  • Canadian GDP for July came in above expectations at 0.2% bringing the YoY total to 2.4%. Canada is the top performing major currency today.
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