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Market opinion round-up: Macro and FX impact of the political storm in Italy

Publication Date: 21 May 2018 - By Gaurav Sharma (Associate Editor ReachX) By Gaurav S.

Environmental, Social & Governance FX & Rates Macro FX Multi Asset EU


The Italy’s bond and equity markets were hammered intraday after it emerged that Giuseppe Conte, a politically inexperienced 54-year-old professor in public administration law might become the country’s next Prime Minister with the backing of Luigi Di Maio, leader of the anti-establishment Five Star Movement (5SM), and Matteo Salvini, head of the far-right League.

Conte might well be the consensus candidate but the markets remain unconvinced, more so as Italy’s public debt is at nearly 132% of GDP; the highest in the Eurozone if Greece is excluded. ReachX brings you the market response to the developing situation:

Ratings agency Fitch, which said political risk was a “key factor” in its downgrade of Italy’s sovereign rating to BBB in 2017, wrote in a note to clients that the next 12 months would be all about monitoring "fiscal loosening and potential damage to investor confidence."

"Full implementation of the core fiscal commitments, notably universal basic income, dual flat tax and changes to the retirement age, would significantly increase the general government deficit," the ratings agency added.

"Proposed revenue-boosting measures, for example on tax compliance and amnesties, would not offset these commitments and the programme is inconsistent with the incoming government’s stated objective of reducing public debt, in our view," Fitch concluded.

Offering a macro perspective, Dan Smith, Investment Analyst at Thomas Miller Investment, said that Italy’s commitment to both fiscal discipline and the European Union is now under a cloud.

"The 5SM and Lega progression in forming a coalition government has increased the level of political risk in Italy, particularly as both parties are interested in relaxing fiscal policy – a result which will raise tensions between Italy and European institutions, and raise question marks over the country's commitment to the European Union."

Latest Reuters’ data suggests yield on the 10-year Italian bond has risen by over 0.50 percentage points over last fortnight, as prices have fallen with the market fretting about the political direction of the country.

So what should the FX markets make of it? Kit Juckes, Head of FX at Société Générale, said it is hard to see what saves the euro from remaining under pressure with dollar shorts being flushed out slowly. CFTC data can be a very "false friend" when it comes to gleaning positioning trends, but when it starts correcting from a very long or short position, it tends to correlate well with prices, he added.

“The big net euro long, and the big net dollar short that is its mirror image, are correcting but only slowly. At a minimum, I'd like to see the net dollar short unwind before thinking of calling a top to this move. And it's hard to see how the weekend news [i.e. a trade truce with China and speculation that Conte will be the next Italian Prime Minister] don't bode well. US FOMC Minutes are due on Wednesday but the main focus is on fiscal policy.”

Actionable idea:  Juckes opined that EUR/USD has major support at 1.1720 (i.e., right here) and then at the low of the September/November consolidation (1.1550).


I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav S.


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