Market News & Insights
4 June 2018

Divisions within Divisions

Over the weekend Italy’s new pro-euro finance minister, Giovanni Tria, was appointed and the day was saved. Well not quite, we still have a long way to go before markets begin to regain confidence in the EU’s ideology. Indeed there is no denying that there is a wave of populist movements throughout Europe, and with this philosophy comes reform. While Mr. Tria stated his intent on sticking with the euro, he did emphasis that the Eurozone needed reform. You only have to look at the differentials in government yields to see the diversity in the single market participant’s health. And while countries like Italy continue to struggle, with an unemployment rate in the double figures, a lagging growth rate and one of the world’s most indebted countries with a +2.25 spread difference against the 10yr bond, talk of reform will continue. This leads us nicely into Brexit, which may make all of the above even more complicated. The UK’s exit has also been hampered with their own divisions, with May’s Conservative Party continuing to battle internally. While the little progress to date has come to a halt, with a resolution around the Irish border still causing headaches, and we look no closer to a solution on the matter either.

Across the pond, where we have further division among old foes, with Trump’s decision to implement the promised tariffs on steel and aluminum on its closest neighbour’s, Canada and Mexico. In fact Trump last Friday, stated he may prefer a separate trade deal with Canada and Mexico instead of NAFTA. Trump’s overall goal here is to bring jobs back to America, however with Friday’s unemployment rate dropping to an 18 year low of 3.8 percent, is there further room here to quantify this? For now the dollar continues to gather pace, following on from Friday’s Non-Farm Payroll figure which beat expectations with markets are now pricing in a further 2.3 hikes for the rest of 2018, compared with 1.5 before the event. Next rate hike decision for the US takes place next week, where markets are pricing in an 85 percent chance of a hike. With a string of stronger data for the US-consumer spending, industrial production and consumer spending, industrial production and construction spending, the dollar continues to be the look to currency.

This week’s calendar is on the light side, with PMI figures from the UK out today and tomorrow, while Mario Draghi speaks tomorrow afternoon to kick things on.