Italian government coalition breakup becomes clearer
Working closely together for a period of 15 months, the Italian government run by the coalition composed of left-populist party Five Star Movement and far right Lega is on the verge of collapse. Although the end of the collaboration was largely expected and particularly following May EU elections major victory of Deputy Prime Minister Matteo Salvini and confirmed by most national opinion polls in his favor, the right-wing League political leader is expected to capitalize on recent victories to take the lead amid a stuck parliament. Yet major impediments remain as the timing for elections in August summer period as well as scheduled preparatory works for the 2020 budget in September are likely to hinder the prospect of elections. Dragging political turmoil in Europe’s third largest country would certainly not be a EUR-positive event, as investors are selling Italian government bonds.
Salvini’s plan to initiate elections would need the approval of numerous stakeholders. “Il Capitano” would require the support from Parliament to initiate a no-confidence vote in the government followed by a resignation from PM Giuseppe Conte. Additionally, Salvini would also have to convince Italian President Sergio Mattarella to dissolve parliament by assuring that a new government would be in place by October to draft the 2020 budget, thus putting the viability of the plan into question. Furthermore, another confrontation with the European Commission must not be ruled out as Matteo Salvini plan to hike deficit in 2020 from current 2.04% of GDP target in 2019 should certainly add up further torment in the Eurozone. The prospect of a potential government crisis in Italy is therefore not supporting European equities, which should close the week in negative territory for the second consecutive time. The reaction on the FX market surprises, with the single currency gaining traction despite the headline, partly influenced by Trump’s fresh salvo of comments on the Fed and the dollar.
Currently trading at 1.1205, EUR/USD appreciation should ease, heading along 1.1180 short-term.
Japan economy surprises to the upside
Despite an upside surprise in Japan’s GDP growth, the yen was little changed. In the three months to June, GDP growth accelerated to 1.8%q/q annualised, beating estimates of 0.5%, while 1Q figure was revised to the upside from 2.2% to 2.8%. In the FX market, investors welcomed the news with little enthusiasm as USD/JPY didn’t budge and continued to trade between 105.80 and 106. This could be viewed as a good news as it would prove that despite the US-China trade war, and rising global uncertainties, the Japanese economy is somewhat resilient to external shocks.
Looking at the details, most of the upside came from an acceleration in domestic spending and higher than expected capital expenditure. However, government spending also gave a significant boost to the final figure. In addition, the central bank has re-opened the floodgate of free money as suggested by the expansion of the BoJ balance sheet over the last eight months. Finally, exports continue to be under pressure against the backdrop of a tense geopolitical situation.
The outlook remains cloudy as the upcoming increase in sales tax in October together with persistent uncertainties stemming from the US-China trade war. We anticipate the economy will remain in positive territory in the third quarter as consumers load up before the tax kicks in.
