2018 Lows for Euro as Italy Flares Up

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Market Drivers May 16, 2018
Euro hits fresh yearly lows
USDJPY rally stalls
Nikkei 0.44% Dax 0.04%
Oil $70/bbl
Gold $1290/oz.
Bitcoin $8200

Europe and Asia:
EZ CPI 1.2% vs.1.2%

North America:
USD Housing Starts 8:30

The euro hit fresh 2018 lows today in morning Frankfurt dealing after news of the Italian governing coalition agreement started to leak out. Although both Five Star and La Lega parties eliminated any language calling for an exit to the euro from the documents, Italian business press reported that the parties considered the idea of asking for $250 Billion sovereign debt forgiveness from the ECB.

The spokesmen quickly dismissed the idea and noted that this was not in the official draft of the agreement, but the news unnerved the markets enough to send Italian government bonds above the 2% level. Italy has the highest debt/GDP ratio in the Eurozone – and in fact, the highest amongst the OECD nations and its sclerotic growth since the global financial crisis has done little to alleviate the problem.

The new government, made up of political outsiders, will only add the sense of chaos in the country and the BTP/Bund spread trade may become the trade of the year as investors flee the uncertainty of Italian regime. It could also become a barometer for the euro itself if the situation comes to a head later on in the year. For now, the overall growth in the region is papering over the brewing conflict, but if the economic situation in the region slows much further, the new Italian government, unencumbered by political norms could wreak havoc in the EZ and usher in a new crisis in the region.

The euro took out the 1.1800 figure in early morning North American trade and could see further selling as the day proceeds. Investors do not like talk of default, even if its used simply as a political bargaining chip and unless the new Italian government shows some maturity quickly further losses in the pair are due.

Boris Schlossberg
Managing Director

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