Morning Commentary: The Italian Job

Foreign Exchange - Morning Commentary
The Italian Job
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Deputy Prime Minister and League leader Matteo Salvini has announced that his party has withdrawn its support of the coalition government.  This announcement means the current government no longer holds a majority in Parliament and opens the door for new elections.  In response, Italian bonds have sold off sharply, and Italy’s banking sector stock index has hit its lowest levels in three years. 
Italy’s coalition government has had a rocky 14-month alliance with one of the more interesting questions being why Salvini waited this long.  According to current polling, Salvini is favored to be installed as Prime Minister of the new government.  However, current PM Giuseppe Conte continues to be defiant, encouraging those hoping an anti-Salvini coalition can survive long enough to pass next year’s budget; this sets Italy up for a bout of political uncertainty.  Ultimately, we hold the view that snap elections are more likely than an alternative government or a government reshuffle.     
Over in the UK, Q2 GDP disappointed by coming in at -0.2% QoQ versus expectations for a 0.0% print.  This contraction represents the first negative GDP growth result since the second quarter of 2012.  The biggest driver of the fall in GDP was the drop in inventory as companies worked down inventory built up ahead of the original deadline.  Currently, a modest recovery is expected in Q3, but the pace of growth is starting to show strains from the weight of Brexit and a slowing global picture.  Should Q3 also show contraction, the UK would be pushed into a technical recession. 
  • German exports fell -0.1%, adding yet another element to the economic headwinds in Europe.  Year-over-year exports have now fallen 8%. 
  • UK election risks have ticked higher on media reports that PM Johnson plans on calling an election in November after delivering a no-deal Brexit.  Opposition leader Corbyn will seek to question the legality of this sequence of events. 
  • RBA Governor Lowe delivered his semi-annual testimony confirming an easing bias but didn’t express an urgency to ease.  The AUD is currently up on the session as the markets had very dovish expectations going into the testimony. 
  • Japanese GDP rose 0.4% versus expectations for a 0.1% rise.  Investment and consumption were both strong.  This positive result increases the odds of a sales-tax hike in October.
  • The Canadian jobs report disappointed with the economy losing 24.2k jobs against expectations for a 15k gain.  The unemployment rate also increased to 5.7% from 5.5%.  This report supports the narrative of slowing Canadian growth as the strong Q2 was supported by temporary factors and global growth continues to slow.
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