Italy held its general election on the 4th March 2018, with a new and unstable government emerging in the subsequent weeks, populated by the dominant Five Star Movement and The League parties. The teachings of the new coalition were of fiscal profligacy, spending their way out of what they saw to be unfair public spending restraints, and a general disdain for the European project itself. With the second highest national debt level in Europe for the past ten years, coming a close second to Greece, it is unsurprising that the consolidation of the new government was watched closely by European institutions, with disagreements erupting to the surface in recent months.
Italy’s fiscal intentions incurred the wrath of the Commission who voted that should Italy not propose a reformed and constrained spending plan, it would be forced to invoke the fiscal imbalance procedure; a punitive mechanism to fine Italy for the risk it is posing to its Eurozone neighbours. A lack of reconciliation within the interactions between the populist coalition and the European Commission has visibly hampered Eurozone economic confidence, the Euro, European and, in particular, Italian equities. However, a breakthrough in negotiations today has seen the Euro enjoy one of its best intraday performances this month and also allowed Italian and European stock indices to recover ground.
The above chart shows EURUSD, measuring the value of one Euro against US Dollars (brown), the FTSE MIB, Italy’s favourite stock market index (orange), and the Euro Stoxx 50, the index measuring the performance of the largest corporations within the Eurozone (blue). The graph demonstrates that since market close yesterday and following the news jointly emanating from Brussels and Italy, Italian and European stock and the Euro have all gained value. The strong bid, particularly in the Euro and Italian domestic equities, represents the market’s sigh of relief at the residing tensions. Today, Rome and Brussels achieved a resolution on Italy’s 2019 budget, helping to ensure stability within the Euro and allowing progress between Italy and the EU. This will not be the last clash between Italy’s new government and Europe, and I’m sure Luigi Di Maio, Giuseppe Conte and Matteo Salvini will not be inviting their counterparts in the Commission to Christmas lunch, however, Italy can continue to spend after Christmas.
In about two hours’ time, the Federal Reserve Bank will publish their interest rate decision for the last time in 2018. The event will be closely watched with yield curves stagnating in the US, threatening a seemingly inevitable recession and putting stress on financial markets. A hike decision, considerable taper, and strong forward guidance will be imperative to restore full strength to the US Dollar.
Discussion and Analysis by Charles Porter