Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of Macroeconomic Research
Summary: Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis.
Market reaction to Italy’s Prime Minister resignation has rather been quiet. Yesterday, Italy-Germany government bond spread was moving lower, around 200 bps, and there was no sign of contagion to other PIIGS countries. Saxo model of periphery weighted spread to Germany (which is GDP weighted) was also down, at 177 bps, close to the lowest levels reached this year.
Investors seem to believe that, in a central bank world, political risk does not matter as long as it is not linked to EZ/EU membership. On the top of that, expectations of further ECB stimulus in September, which could consist in a new QE package coupled with lower deposit rate, is also pushing down interest rates.
Conte’s resignation turns the focus to Italian President Mattarella. We think there are mostly three options to solve the ongoing political crisis:
1/ A grand coalition that could gather the PD and the M5S with potential participation of Forza Italia (this scenario, that was quite unlikely a few days ago, has been intensively discussed since yesterday). It would be the most market-friendly option and it seems to be supported by the European Commission ahead of budget discussion.
Market impact: LOW. Italy-Germany gov. bond spread around current level, at 200 bps.
2/ A caretaker government whose main objectives would be to pass 2020 budget and implement more tightening in order to be in line with the European Commission’s deficit target. At first, it looks more market-friendly than the previous option, but this government is unlikely to last long. New elections would need to take place next year. This option would be a form of “extend and pretend”.
Market impact: VERY POSITIVE (at first). Italy-Germany gov. bond spread below 200 bps.
3/ Snap elections in Q4 2019. This option implies an elevated risk that Salvini could be in a position to form a right-wing coalition, which would increase tensions with the EU and other European governments, notably France.
Market impact: NEGATIVE. Italy-Germany gov. bond spread back to 300 bps.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)