Markets fall as Italian and UK politics take centre stage

European and US stocks are drifting lower as we await a host of central bank events. Meanwhile, Italy has taken the lead with a vote of no confidence ahead of a similar move in the UK next month. 

• Market indecision evident as central bank events come into view
• Italian coalition cracks after vote of no confidence
• Brexit uncertainty set to rumble on until Labour-led vote of no confidence

Market instability continued to rumble on, with yesterday’s gains all but eroded after a day of losses throughout Europe and the US. On a day devoid of any major economic releases, Europe has been the focus of market attention thanks to Brexit fears and Italian political uncertainty. Overnight minutes from the RBA have provided markets with a taste of the central bank focus that looks set to dominate the rest of the week, with FOMC and ECB minutes providing the precursor to the Jackson Hole meeting. 

It seems that the European political picture is set for a volatile few weeks, with today’s vote of no confidence in Italy expected to be followed up by a similar move in the UK next month. Cracks had appeared in the Italian ruling coalition ever since the deputy prime minister called for a breakup of that union earlier this month. Thus, with market already expecting today’s move to come soon enough, we can see why we are seeing a relatively subdued response from the MIB.   

Brexit sentiment seems to be shifting on a daily basis, with markets caught between the optimism of a cross-party deal to avert a no-deal Brexit, and the pessimism of Boris Johnson’s unwavering stance. Ultimately the pound has largely been valued in accordance with the chance of a no-deal Brexit, which to a large extent is seen as a worst-case scenario. The fact of the matter is that the possibility of a cross-party alliance gives the EU little encouragement to bend to Johnson’s requests. Angela Merkel did give some hope in claiming that the EU could think about a practical solution to the Brexit impasse, yet everything we have heard from the likes of Tusk and Barnier suggest otherwise.

Instead we are likely to see volatility for the pound with the outlook dictated by whether or not Johnson survives a vote of no confidence next month.