Italy is back under the spotlight
The Italian budget situation took centre stage on Monday morning as traders return from the weekend. The FTSE MIB gave up another 1.80% to reach 19,962 points, its lowest level since April 2017. In the bond market, the country’s sovereign yields accelerated Friday’s upward trend. The 2-year yields climbed 19bps to 1.54%, while the 10-year one added 20bps to 2.83%. Against suche a backdrop, the single currency erased 0.30% and returned below the 1.15 threshold, while the dollar rose across the board. As usual during risk-off reaction, safe haven currencies were the only one able to hold ground. USD/CHF consolidates around 0.9920, while USD/JPY holds ground around 113.70.
Italian Deputy Prime Minister Di Maio continues to ignore markets’ punishment and holds its ground as EU deadline approaches. In an interview with Corriere della Sera, Di Maio anticipated that EU citizens would express their dissatisfaction with the Union austerity plans as he declared “There will be such an earthquake in all countries against the austerity that the rules will change the day after the elections (i.e. EU 2019 parliamentary election).” The cost of insuring exposure to Italian debt were roughly unchanged on Monday, with the 5-year CDS stabilising at 221bps.
We believe that the downside is limited in EUR/USD. Indeed, Italy has made its point against austerity and we believe that the EU got it. Italy already showed that there is room for negotiation as Economy minister Tria said las week that Italy plans to cut budget deficit starting in 2020. Obviously, it will requires efforts from both sides but middle can be found. EUR/USD has erased Thursday’s gains and is currently heading towards the closest support that stands at 1.1464 (low from October 4).
