It’s Judgement Day for Italy and the EURO

It’s a big day for the EUR, as the Italian coalition government awaits the EU Commission response to a slightly amended budget.
Bob Mason
National flag of Italy and European Union

Earlier in the Day:

There were no material stats or policy statements or central bank speeches through the Asian session to provide direction in the early part of the day, leaving the markets to consider the current state of play that includes a broad based sell-off across the global equity markets, stemming from growing concerns over the global economic outlook, along with Britain’s departure from the EU, the Italian coalition government’s collision course with the EU Commission and Trump’s trade war with China and the seismic shift in U.S foreign policy.

A 500 point slide in the Dow in isolation is one thing, but a 1,000 point slide in a week is an altogether different proposition, particularly when considering the latest earnings results and recent economic indicators that have certainly not justified the latest sell-off.

Looking at the Asian majors in the early part of the day, it’s been a relatively tame morning, with the Aussie Dollar up 0.22% to $0.7230, while the Japanese Yen was down 0.12% to ¥112.91 against the U.S Dollar at the time of writing. For the Kiwi Dollar, it was a flat start to the day, following Tuesday’s reversal, the Kiwi up just 0.03% to $0.6791.

In the Asian equity markets, the sell-off in the U.S spilled over to the Asian session once more, with the Nikkei and ASX200 down 0.76% and by 0.62% respectively, at the time of writing, while the Hang Seng and CSI300 were down 0.61% and by 0.04% respectively, the majors managing to recover from heavier losses early in the day..

The Day Ahead:

For the EUR, there are no material stats scheduled for release through the day, leaving the markets to focus on the Italian coalition government’s collision course with the EU Commission, which is expected to reject Italy’s slightly amended budget proposal later this morning.

10-year government bond yields will be the area of focus, with the spread between Italy’s 10-year bond yield and that of Germany’s needing to hold below 400 bps to avoid a market meltdown. The writing may already be on the wall, with few expecting anything but a rejection by the EU Commission. What isn’t clear is how the Italian coalition government will respond.

Could we see the Dollar reach parity with the EUR? The Greek debacle failed to deliver, but Italy’s a different proposition altogether, any talk of leaving the EUR likely to have a material impact on the EUR and much more.

At the time of writing, the EUR was flat at $1.1370, with today’s decision and Italy’s response the key driver.

For the Pound, there are also no material stats scheduled for release through the day that leaves Brexit front and centre, British Prime Minster heading to Brussels with pride intact, the euro sceptics having failed to force a vote of no confidence earlier in the week.

While there have been some misgivings, Theresa May has managed to rally the troops and align interests in order to avoid a no-deal event, raising hopes of parliament voting in favour of Theresa May’s proposed exit plan.

Talk of Spain planning to reject the draft deal because of a lack of clarity over Gibraltar could be the next storm for the Pound, though with the EU Summit just 2-weeks away, there’s talk of the issue being resolved through the weekend.

Theresa May will be more interested in garnering the 20 votes from EU member states, but Spain’s support would be an important one to leave the EU in calm waters.

At the time of writing, the Pound was flat at $1.2783, with Brexit news the key driver through the day.

Across the Pond, economic data scheduled for release through the day is on the heavier side ahead of Thanksgiving, with key stats scheduled for release later today including October durable goods and core durable goods orders, existing home sales and finalized November consumer sentiment numbers.

While focus will be on existing home sales and durable goods orders, geo-political risk will also play a hand with today’s EU Commission decision on Italy’s budget and more to influence demand for U.S Treasuries.

At the time of writing, the Dollar Spot Index was up 0.01% to 96.842, geo-political risk and economic data the key drivers through the day.

For the Loonie, after a quiet start to the week, September wholesale sales figures will provide some direction ahead of tomorrow’s inflation and retail sales figures, though it could turn out to be another tough day should this morning’s gains in crude oil prices reverse later in the day.

The Loonie was down 0.02% to C$1.3308 against the U.S Dollar at the time of writing.

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