Markets in Europe this morning opened flat with investors awaiting the ECB’s decision on interest rates later this afternoon. Earlier in the week we saw markets a little on edge after Trump’s tariff tantrum, and the Italian election result which saw the ruling Democratic Party crashing to its worst ever result. Italian stocks slumped to 6 month lows after larger than expected support for anti-establishment parties in Sunday’s election. Italian bank stocks were hit hardest as investors prepare for a hung parliament and the potential for another Greek like euro and EU exit examination. Similarities can be drawn from both economies, with high unemployment/debt levels, and large influxes of migrants. While Grexit seems like a life time ago, its ideology seems to have survived and should be a concern for the euro and the EU as a whole. ECB President Mario Draghi is scheduled to hold a press conference after the interest rate decision this afternoon. While we will be looking for insight into the central banks next move regarding its monetary policy, it’ll be interesting to see if what happened in Italy over the weekend will impact the ECB’s forward guidance.
On the data front, the Eurozone has started to lag a little with the headline inflation number now at 1 year lows. Yesterday’s German Factory Orders also missed markets expectations, with foreign orders falling 4.6% compared to December. We have spoken in the past around the euro strength and the potential for it to unwind the Eurozone’s recovery. EURUSD had broke above the 1.24 level earlier this morning but it’s back below at the time of writing, 1.2360 should act as a level of support for now. EURGBP pushed above .8950 (GBPEUR 1.1173) in yesterday’s trading session, touching highs of close to .8970. This morning however, we’re trading back below .8950. Today’s ECB conference could provide the stimulus for new trading ranges.
Over in the US, and it’s political risk that is again weighing on market sentiment. The timely departure of Cohn would suggest that perhaps he was losing the battle over future trade policies and there may yet be more unwelcome tariffs ahead. On the data front, yesterday’s ADP employment report would suggest that the labour market continues to remain robust with private sector employers adding 235K jobs. This figure bodes well for Friday’s headline Non-Farm Payroll figure, and barring a complete collapse in Friday’s figure, we should see the Fed raise rates later this month.
Over in the UK and apart from Brexit related news it has been a relatively quiet week. It will be interesting however to see if Britain can use Sunday’s election result in Italy to perhaps stir up some ill feelings towards the EU’s policies. Could we now see a shift in the Brexit negotiations momentum or could this spur the EU to deliver a package that would deter other countries from a similar fate.