Italy Busts Budget, Euro Tumbles

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Market Drivers September 28, 2018
Italy budget woes drive euro to 1.1600
UK GDP in line
Nikkei +1.36% d Dax -0.69%
Oil $72/bbl
Gold $1183/oz.
Bitcoin $6700

Europe and Asia:
GBP UK GDP 1.2% vs. 1.3%
EUR CPI 0.9% vs. 1.1%

North America:
USD Personal Spending/PI 8:30
CAD GDP 8:30

The euro took a tumble today breaking the 1.1600 barrier as Italian assets saw a major selloff in the wake of higher than expected deficit on the Italian budget.

The newly elected populist government insisted on running a 2.4% budget deficit which was above market expectation and sent Italian sovereign bonds rates to their highest yield in months. The risk-off sentiment spilled over equities and FX with EURCHF taking the brunt of the move. Euro is now down more than 150 points in less than 24 hours as the pair continues feel the pain of investor worries.

Adding to the sour mood today was news that core inflation came in below expectations at 0.9% versus 1.1% eyed indicating that price pressures in the region remain subdued. All of this leaves an open question as to how aggressive the ECB will be with regard to its attempt to taper and begin normalizing monetary policy.

Mr. Draghi sounded upbeat and nonchalant about sovereign debt risks in the region at the last ECB presser, but that was before the fiscally explosive budget by the new government. The Italian government is taking a risk that fiscal stimulus will spur growth in the sclerotic economy which in turn will generate tax flows to minimize the deficit, but if that bet fails the ECB will be faced with a gargantuan task of backstopping the Italian sovereign debt market and that is causing serious concern in FX right now.

Meanwhile, in the US the market will get a look at the personal income personal spending data which could be crucial to USDJPY. The Fed’s tightening policy is based on the assumption that higher demand for jobs will lead to wage growth which has yet to happen so if the numbers surprise to the upside they could lead to a sustained rally in USDJPY taking it above 113.50 and put 114.00 into view.

Boris Schlossberg
Managing Director

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