Towards the end of yesterday’s European close there was a correction in risk appetite that saw the US Dollar appreciate against the Euro and commodity currencies. The sharp move that was precipitated by little fundamental adjustments or news headlines highlights the still fragile sentiment in global markets, particularly within the Eurozone. As this year has begun, despite the obstacle for Brexit largely surmounted, Eurozone risk has ticked up. This fragility allowed risk conditions to turn around almost instantaneously, translating into real price movements as sentiment ebbs and flows. Eurozone risk is heightened by the political uncertainty in Italy, the Netherlands and Germany, as well as lockdown’s accelerating throughout the Union’s core economies. Last night, the resignation of Italian Prime Minister Giuseppe Conte didn’t move markets immensely with expectations for political uncertainty already priced in.
The spread of Italian yields over German Bunds in a key metric of risk in the Eurozone and bears a strong correlation usually to the Euro. This spread has been rising to three-month highs, bracing for an inevitable breakdown in many Eurozone polities. Last night’s resignation by the Prime Minister was largely expected after he lost the support of former Prime Minister and leader of the Italia Viva party, Matteo Renzi, one of Conte’s coalition partners. However, the resignation was framed as an opportunity to secure a Presidential mandate to form a stronger government within the Senate, possibly without so many coalition partners. Given the near impossibility of holding elections within the nation given the current pandemic, it is thought now that Conte might use the need for immediate and strong governance to his advantage to secure a reformed coalition.
Stepping down ahead of a vote in the Senate scheduled for tomorrow on his own terms is even being interpreted as a potential improvement in European risk. The PM is set to offer his formal resignation to President Sergio Mattarella early this morning having failed to build sufficient support having narrowly survived votes of no confidence in both houses of the Italian parliament last week, saving him from potential embarrassment on Wednesday. The Five Star Movement was quick to reassert their support for Conte in an early sign that a new coalition could be formed. The Euro this morning, now trading within more liquid and voluminous European and London trading hours has shrugged off any weakness that the announcement of his resignation ushered in last night.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Rather you than me, Christine
Charles Porter
Thu 7 Dec 2023
Rather you than me, Christine As we and the market alike have been speaking about recently, Eurozone rates are all the rage. As we highlighted yesterday, the path for rate cuts next year has already captivated the market with easing being forecasted as early as Q1 2024. As we approach the Christmas period, we must […]
Morning Brief – European Interest Rates
Humphrey Percy
Wed 6 Dec 2023
European Interest Rates More momentum on rate cuts in the Eurozone as expectations grew for cuts starting in March and totalling 140bps in 2024. Equally in the UK cuts of 130bps starting in June are being pencilled in to market calendars. What this means is that GBP/EUR is looking more than especially good value at […]
Morning Brief – Eurozone
Humphrey Percy
Fri 1 Dec 2023
Eurozone That was a surprise: yesterday the EU announced that inflation had fallen to 2.4% which was considerably better than the 2.7% that markets had expected. Despite the ECB saying it was far too early to cut rates, the market has pencilled in the first cut for April. Before getting carried away it should be […]
