Global equity markets have remained under pressure since the end of last week due to the announcement of tariffs on steel and aluminum imports in the US which sparked fears of the beginning of a global trade war. Most of the major European equity indices dropped by more than 2% on Friday whilst Asian equity markets are broadly lower as of midday local time today.
EUR opened this week on the back foot after the Italian election resulted in a hung parliament whilst JPY and gold have opened stronger on the back of safe haven demand.
In Italy, the election on Sunday resulted in a hung parliament and as has been the case in several European elections as of late, non-traditional parties made significant gains illustrating the frustration many voters have towards more established political parties. The Five Star Movement and the Lega Nord both surprised to the upside which leaves the future government highly uncertain although a wide coalition appears most likely.
In Germany, the SPD voted in favour of a Grand Coalition with a 66% majority as per the results released yesterday. This resolves a lot of political uncertainty and should be positive for the domestic and European economy.
Whilst the agreement to form a coalition in Germany should be EUR positive, the Italian election is likely to weigh on the currency. The future Italian government still remains highly uncertain meaning that investors will have to wait before drawing any significant conclusions from the election.
Looking to the week ahead, focus will be on the ECB meeting on Thursday and the US February jobs report on Friday.