Euro tanks as Italian leaders challenge EU

Michael McKenna

Head of Editorial Content, Saxo Bank Group

Markets and the euro saw only muted moves when the anti-establishment Five Star/League coalition took power, but that has changed now that the country's new leaders have started to talk about their policy plans.

The major draft idea pushing EUR lower and Italian bond yields higher today is a request for a $250 billion debt write-off from the European Central Bank, but discussions on potentially abolishing the European Union's rule on keeping budget deficits below 3% of economic output, as well as plans to limit immigration, are weighing on sentiment as well.

"The market is presently trying to price in the negative news," says Saxo Bank fixed income specialist Althea Spinozzi, while Saxo head of forex strategy John Hardy notes that the Italian yield blowout is dragging the peripheral spreads complex wider as well.

As far as the euro goes, Hardy says that traders should watch EURGBP for a potential re-evaluation of Brexit Britain next to an existentially challenged EU. Hardy also reports that traders should keep an eye on Brent crude as it nears $80/barrel, noting that higher oil prices represent a "severe growth tax" for the world, particularly in a strong USD environment.

The stronger dollar is certainly impacting emerging markets with Saxo Bank head of equity strategy Peter Garnry saying that "EM countries are in worse shape than in 2008, and given the cracks appearing in Turkey and Argentina, investors should consider the possibility of an EM crisis."

On the Turkish front, Hardy concurs, stating that he is keeping a watchful eye on TRY ahead of the June 24 elections.

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