Market News & Insights
1 June 2018

Italy Settles Amidst a Return to Trade War Fears

Italy’s political stability and renewed global trade fears dominated yesterday’s headlines in an afternoon that saw Italy’s political crisis end as quickly as it started. Two of its largest anti-establishment parties, the League and the 5 Star Movement, finally agreed on a deal to form a coalition government, thus confirming a Eurosceptic administration will run Europe’s third-largest economy. The new government will have Guiseppe Conte, the parties’ original pick for its prime minister in their first attempt, as its premier and could be sworn in as soon as this afternoon. Luigi Di Maio, leader of the 5 Star Movement, will become welfare and economic development minister. Initial appointment of certain ministers’ forecast the coalition to follow original campaign promises on immigration and economic revitalisation. Initial reaction has seen EUR open cautiously, likely due to a combination of Italy and US imposed tariffs. EURUSD reached 1.1702 on open but market digestion of the news has seen it ease back below with lows at 1.1664. EURGBP has also seen restricted movement of 0.2% (0.8790 Low – 0.8809 High). On the upside, EUR has made moderate gains on both CHF (+0.23% 1.1563 High) and JPY (+0.35% 127.796 High). Pulling away from Italy, Spain also made the headlines as Prime Minister Mariano Rajoy looks set to be removed from office following a corruption scandal dealt the final blow in already wavering support.

Trade war fears are back with a vengeance after Trump kept true to his word and imposed tariffs on steel and aluminium from the European Union – offering little hope in an already deteriorating trans-Atlantic relationship. Such outrage was summed up by French President Emmanuel Macron who claimed the move from Trump’s administration is “illegal” and “not in line with international trade law”. Irrespective of its legal status, the move is certain to pack a punch on EU leaders when you combine the international strain it introduces and internal political issues of their own. European fears were not alone following the news as the US Markets reaction saw The Dow Jones drop 250 points as business sentiment in the US voiced concerns over the tariffs. The head of the US Chamber of Commerce stated that the new trade policies, combined with the US pulling out of NAFTA could stunt the US’s impressive economic growth and threaten as many as 2.6 million US jobs. With this sentiment, this afternoon’s Non-Farms release, forecast 189k previous 164k and released at 1:30pm London-time, will be in key focus. Currency wise, the dollar is up against all major currencies this morning. USDJPY is up 0.3% with 109.240 highs.

UK Manufacturing PMI’s were this morning’s main focus for GBP, coming in above forecast at 54.4 from 53.9 previous. Markets generally ignored the result given the upside of the notable 50.0 level. Sterling’s initial reaction saw a slight spike on all major currencies, GBPEUR reaching 1.1375 highs. GBPUSD has remained in the 1.3252 – 1.3295 range. UK news has been generally quiet over the course of this week. Reports rose this morning of a fresh BOE/Government gender dispute after the BOE external economist role went to a man despite four women making the short list. Brexit news is quiet ahead of June’s upcoming summit.