Italian budget overhyped
Concern over Italy’s budget are overwrought. The government in Rome has passed a budget with a 2.4% deficit relative to GDP – slightly higher than expected, considerably higher than 1.6%-1.8% recommended. Euro Stoxx 50 are lower while EUR/USD has fallen 1.40% to 1.1620. Italian bond yields continue to rise. We suspect that lasting effects will be limited and expect the Euro to recover.
First, the European Central Bank is still active in the bond markets that provide support. Markets should not underestimate the ECB’s conviction to maintain European stability. Let’s not forget ECB President Mario Draghi’s famous speech on 26 July 2012 over the ‘irreversibility’ of the euro and ECB’s readiness to do ‘whatever it takes’ to preserve the euro. Second is the global relevance of budget deficits. It been a long time since markets really cared about maintaining a balanced budget, so why should this matter in Italy? Aggregate Eurozone has an 86% debt to GDP, just slightly above the UK’s. And then there is the USA’s swelling deficit. As investors turn their attention to the Ryder Cup (Europe will not hold their early lead), the Euro will recover.
Crude talk
Crude oil is about to end another week in green, as a barrel of West Texas Intermediate rose as high as $72.78. Despite anticipations of tighter supply, thanks to Iran sanctions and shrinking output in Venezuela, crude prices have tread water since Tuesday. The $71.45 – $72.75 range is holding: traders don’t know where to stand. There is growing sentiment that crude is heading towards $100. The US government said it won’t release emergency crude reserves to keep prices low.
From a technical standpoint, the WTI is still trading in its long-term and short-term uptrend channel. On the downside, a short-term support lies around $72.15, while a medium-term one can be found at $69 (50-day moving average). In absence of a vocal intervention from The Donald, investors will stay side-lined ahead of the weekend – range trading will dominate.
