Market movers today
Much focus will remain on Italy amid the ongoing discussions on forming a viable government. It is still an open question whether new elections will be held and when or whether the Five Star/League or an interim technocratic government will go ahead.
In the euro area, the HICP figures for May are due for release today. On the back of higher-than-expected German (2.2%) and Spanish (2.1%) figures released yesterday, we raise our forecast for today s euro area HICP inflation to 1.8% (1.6% previously) and core inflation to 1.1% (1.0% previously). The magnitude of rebound in core will also have important implications for the timing of the next change of ECB forward guidance (we still expect it to come at the July meeting).
Overnight, we get Chinese Caixin PMI data. We look for a small decline, but reckon there is upside risk to this view after the official manufacturing PMI rose in May.
Selected market news
In China, the manufacturing PMI rose to 51.9 in May from 51.4 in April. Consensus had expected it to stay unchanged, while we had been looking for it to drop to 51.1. Hence, that means economic activity improved in China in May.
The Italian political drama drags on. Although market sentiment recovered somewhat from the sell-off on Tuesday (see also The Italian market panic – drivers and near-term outlook ), the political outlook remains unclear, following conflicting comments from Five Star and League politicians during the day. The option for a technocratic government seems to be on hold for now, after PM-designate Cottarelli is awaiting the possibility of a political government between Five Star/League/Forza Italia and other political parties emerging. A renewed Five Star/League push to form a government remains an option, but both parties have also repeated their call for new elections, raising the threshold for a compromise on any deal. We expect the Italy theme to stay with us in the next weeks and months and market sentiment to remain very volatile in the near term.
China is apparently getting ready to take the next step in the ongoing trade war against the US. It was said yesterday to be contemplating lining up European and Asian countries in the rift with the US.
Oil prices recovered yesterday, with Brent moving back above USD77/bbl. The move came on the back of news that Iran’s exports are starting to be affected by new US sanctions and rumours that OPEC might keep production cuts in place until the end of the year rather than start raising output already from H2.
