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
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