The Italian job

The Day So Far

Equity markets in Europe remain on the front foot with market participants relieved that the Italian government has been quick to step in and commit to taking a EUR 2bln controlling stake in the troubled bank Monte dei Paschi de Siena. According to Reuters the State already owns a 4% stake but is looking to buy junior bonds held by ordinary Italians to take the holding up to 40%. It may well be this strategy that is helping lift sentiment for the Italian banking sector in the short-term, in addition to the fact Renzi is to remain in place as Prime Minister until the country’s budget law is passed in parliament this week. My thoughts on here are that you need to stick to the trend for the time being and with QE set to be extended by the ECB tomorrow I think equities in Europe will remain supported. However, once we head into next week I think we will get a more thorough test of the markets current optimism and when Renzi’s resignation is formalised, and we move into a period of political limbo, the moves that have occurred in the last 48hrs may well be taken back.

Looking elsewhere, GBP has come under pressure this morning as UK Prime Minister Theresa May accepted the Labour Party motion to have a debate in the House of Commons today over the government’s plans for leaving the EU prior to triggering Article 50. I think that this move in addition to the fact that the latest conversations with the EU appear to lean towards a negotiation period of between 15-18 months means that reality is starting to set in. Let’s not forget that it was the Belgium region of Wallonia that caused such a headache to the recent trade deal with Canada, so with an overall Brexit plan to be verified by each respective local parliament, time is not on Theresa May’s side.

The Afternoon View

Looking forward economic data from the US comes in the form of JOLTs job openings but this is now an after thought given that perceptions on a Fed hike have been solidified. As such rather than looking to the data to spark the market into life I think we are better served to stick with the current market trend which is maintaining a long view in the S&P, oil and the EUR, while looking to re-enter a short position in T-notes. Elsewhere, with GBP already underperforming I would advise vigilance on monitoring the on-going Supreme Court hearing. Although this is not due to conclude until late Thursday afternoon I would be mindful of leaks hitting the tape from here on out.