Italy headed towards constitutional chaos

May 29, 2018

A rather quiet Tuesday as far as announcements go, but geopolitical events could dictate the direction of markets.

Italy is on the brink of a constitutional crisis. The country has been without a government since elections were held in March. This is because the country’s President has rejected the appointment of a euro-sceptic minister holding a top economic position within the government. This has led the President to appoint a former IMF official to lead an interim government. The situation is complicated by the fact that anti-EU parties have enough support to block Presidential appointments. This could then lead to no government being formed and the country may be forced to return to the polls for another election. This could become quasi-referendum on Italy’s membership in the EU, such is the support for anti-EU parties.

The EUR/USD was hammered overnight, possibly due to the problems in Italy. The euro opened at $1.16836 and climbed to a high of $1.17726 in mid-session trading. It started to go pear-shaped when the European markets opened, the euro giving up all of its gains as it tumbled to lows $1.16060. It is not far off those lows, currently trading at $1.16248. The GBP/USD fared better than its euro counterpart. After opening at $1.33076, it climbed to highs of $1.33406 a few hours later. It could not hold onto those gains as it declined to lows of $1.32954. It regained some of those losses as it currently trades at $1.33100.

The Dow continues to disappoint. The Dow opened yesterday at 24,807.00 and then climbed to highs of 24,844.00 a couple of hours later. From that point, it remained rather flat for a few hours, then the decline set in. It fell to lows of 24,711.11 in late trading but was able to regain some of those losses. It is currently trading at 24,760.50. The Dax was belted overnight, weighed down by the chaos in Italy and the poor performance of the Dow. The Dax 50-odd points higher than Friday’s close and quickly reached a high of 13,034.30. It gave up all of those gains as fast as it piled it on, as it tumbled to lows of 12,818.60 a few hours later. It recovered some losses, closing at 12,854.30.

The day ahead is thin on the ground for announcements, but it is still headlined by significant data from the US. Later tonight, the US CB Consumer Confidence data will be published. This data is important to determine consumer sentiment within the economy. Confident consumers tend to spend more money, which in turn spurs inflation and economic growth. It would be prudent for traders to keep an eye on the events unfolding in Italy, as this may affect European markets and EUR-paired currencies. Other data set for release today includes:

Japan – Retail Sales

UK – BRC Shop Price Index

US – S&P/CS Composite-20 HPI

NZ – Building Consents, RBNZ Financial Stability Report

Europe – Swiss Trade Balance, European Private Loans & M3 Money Supply


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