All eyes on Italy
By Arnaud Masset
On Monday Italian stocks fell 1.8% to their lowest since April 2017. Meanwhile, sovereign yields accelerated Friday’s uptick: 2-year climbed 0.19% to 1.54% and the 10-year added 0.2% to 2.83%. So the euro erased 0.30% and returned below the 1.15 USD threshold, while the dollar rose across the board. EUR/USD has erased Thursday’s gains and is currently heading towards the closest support that stands at 1.1464 (low from October 4). Safe haven currencies held ground. USD/CHF consolidated around 0.9920, while USD/JPY held around 113.70.
We believe the downside is limited in EUR/USD. Italy has made its point against austerity and we believe that the EU got it. Italy shows there is room for negotiation as Economy Minister Tria said last week that he plans to cut deficits starting in 2020. This will require effort from both sides, but a middle can be found. Deputy Prime Minister Di Maio continues to ignore markets’ punishments. 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 (EU 2019 parliamentary election).”