Italy is the big new risk Italy is the big new risk Italy is the big new risk

Italy is the big new risk

Macro
Christopher Dembik

Head of Macroeconomic Research

A draft of a purported programme for government between Italy's Eurosceptic Five Star and the far-right League seems to confirm that Italy may become a major issue for financial markets and the euro if a such a government were established.

The draft includes:

•  a shadow cabinet
dropping Russia sanctions
mechanism to leave the euro
change EU treaties, stability rules
commit to NATO but wants to revisit Italy's role in some missions
ask the ECB to cancel Italy's €250bn debt

It might sound quite improbable and unrealistic but it looks like the two coalition partners are betting that a Eurosceptic European Parliament would be able to control the Commission. I doubt this very much since the Franco-German pair still has strong leverage over European institutions. But what is certain is that we should get ready to face a significant victory for  Eurosceptic parties at the 2019 European election.

Obviously, the document is a draft and it has been leaked for a reason, probably because some of these points may be stalling negotiations.

However, it is still worrying and it is another concern for the euro. This leak happens at the worst possible moment:

yesterday, eurusd broke lower and there were new highs in US 2-yr and 10-yr yields
Italy's credit impulse is sluggish meaning growth is doomed to decline
data published yesterday for Germany confirms the euro area growth has reached a plateau, probably in Q4 2017 – the Goldilocks economy is definitively over
Quantitative tightening is adding downward pressure to the equity market
The one-year moving average geopolitical risk index is close to peaking

All of that seems to favour the USD vs the euro and most of the other currencies. If Italy becomes the new risk for the market, investors will look for a safe haven and, as usual, this means being long USD.

 

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)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992