Brinkmanship in Italy nor Brexit: why does the EUR stand still ?

Swissquote Bank Research Team Swissquote Bank Ltd

Things are a little confusing as financial markets are turning in differing directions. Following the speech made earlier this month by Deputy Prime Minister Salvini that new elections had to be run and that a vote of no-confidence against current government was required, PM Minister Giuseppe Conte surprised by announcing his early resignation, marking the end of the 15-months coalition composed by left-populist party Five Star Movement (M5S) and far right Lega. Henceforth, it is time for Italian President Sergio Mattarella to assess whether a new government can be formed by consulting both Parliament and political party groups until Thursday. On a side note, UK PM Boris Johnson is expected to meet with EU leaders to discuss alternatives regarding the Irish backstop, a move that should come without conclusive results and reinforce Johnson’s rhetoric that a hard Brexit is the only way, a rather negative outlook for GBP in the face of recent uprise. Despite uncertainties on upcoming events, the single currency remains unaffected by headlines while Italian BTPs are in demand as investors favor the scenario of an alternative coalition over potential general elections.

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There is however good reasons to consider that general elections along end of October could take place, as the most-favored options consisting either of a new coalition composed of Luigi Di Maio M5S and Nicola Zingaretti Democratic Party could face resistance among members while a reconciliation of Salvini’s Lega and M5S is doubtful. This would leave the door opened for general elections in Q4:2019 following Matarella’s decision to dissolve Parliament and potentially provide a victory for Matteo Salvini. In this context, the European Commission 2020 budget would be postponed until a new government is formed. In addition, major rating agencies S&P and Moody’s would likely maintain their current negative outlook on Italian sovereign debt, with both ratings currently given at two notches from junk, a decision that should ultimately force investors to reassess Italian assets. As the Jackson Hole annual Symposium is expected to absorb much of the attention, the EUR will remain silent for now.

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Swissquote Bank Research Team

Swissquote Bank Ltd

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