Morning Commentary: Politics Never Sleep

Foreign Exchange - Morning Commentary
Politics Never Sleep
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Last Friday, markets were thrown another Italian curveball when Deputy Prime Minister Salvini called for a snap election.  However, as with all politics, things are never straightforward.  Beyond the issue of Prime Minister Conte resisting the call for a snap election, there is broader concern over what happens to the 2020 Italian budget as it affects Italy’s relationship with the EU. 
 
With regards to the budget, there are two key elements—timing and content.  October 13 is the first day that elections can be held, and unfortunately, that is also two days before the budget is due to the EU.  There is also the issue of content as the budget tries to balance stimulating sluggish growth, which calls for fiscally costly policies while staying within the EU’s spending rules.  The latest twist to this drama has been talks between the Five Star Movement (5SM) and the Democratic Party (DP) to avoid snap elections.  Historically speaking, these two parties are not allies. 
 
Over the weekend, Matteo Renzi of the Democratic Party, gave an interview expressing support for a grand coalition government provided that this government could deliver a 2020 budget and finalize a constitutional bill reducing the number of MPs from the next Legislature.  In order to establish a government, the support of at least 316 Deputies and 161 Senators (including 3 life Senators) are needed.  Theoretically speaking, DP and 5SM have just enough votes to make this happen.  But in reality, unless PD party leader Zingaretti changes his mind, it is unlikely that 100% of the DP members would support Renzi’s cause.  Ultimately, there are many obstacles remaining, both for snap elections and forming an alternative government, but the latest developments have certainly moved the prospects of a grand coalition government from a tail event into the realm of possibility.          
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • Tensions in Hong Kong continue to run high with authorities in Hong Kong cancelling flights after protesters filled the main terminal building.  The continued protests have put additional pressure on Hong Kong’s already struggling economy which in turn has added to questions on the authorities’ ability to maintain the HK dollar’s peg.  
  • The Argentine peso is under sharp pressure after President Macri lost a primary vote by 15 percent.  This larger-than-expected defeat throws into question the future of the market-friendly Maci.  Should this result be repeated in October’s presidential election, a runoff vote will not be needed.
  • Over in the UK, the Good Law Project’s case—which is asking the Scottish Court of Sessions to rule that PM Johnson can’t shut down Parliament leading into October 31 to allow a no-deal Brexit - will have a hearing on Tuesday to decide the timeline for the case and its ruling. 
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