Inside the Hourglass,
Sovereign states must increasingly feel as though their countries are built upon the bedrock of the sand in a rapidly shrinking hourglass; assuming a position in an ever-collapsing pool, occasionally colliding with each other and frequently going under. Today was the turn of Euro to take a turn for the worse. Markets reacted badly to Italy’s delay in publishing their fiscal spending plan yesterday. Selling Italian assets instruments in their billions, equity markets tumbled with bond yields hitting fresh highs. The Euro was also hampered by the perceived political risk within Italy, allowing the value of the Euro against the Dollar to fall through 1.17. With the announcement that the budget deficit will now only be curtailed to 2.4% (instead of a promised 1.9%), the Euro lost further value with a loss of value equivalent to 1.84% in 48 hours. The revised fiscal expansion by the newly formed coalition suggested to markets that the more dominant League party was succumbing to populist pressure rebelling against the Eurozone’s bias towards austerity and fiscal responsibility. With EURUSD breaking below 1.16 once again, the value of 1 Pound against the Dollar also dropped bearishly towards 1.3000. Considerable resistance was found at this level, forcing a sharp and immediate devaluation of the US Dollar. For now, the drama in Italy still appears largely contained within the borders of the Mediterranean, stopping short of the rest of mainland Europe. This is apparent whilst domestic bonds rally and the stock market loses as much as 4% on the day. However, the risk of contagion cannot be continually underplayed as it was post-Brexit. If Italy falls in either direction, it could still spell disaster for the Eurozone.
- GBP: Readings of finalised second quarter economic growth confirm expansion in the domestic economy, Sterling fails to catch a bid amidst market wide volatility.
- EUR: A change of heart leaves the Euro scratched and Italy wounded. Secessionist sentiment doesn’t have to be exposed at the ballot box, the situation in Italy could raise its head at any point.
- USD: Discovering resistance at 1.30 against the Pound, the Dollar takes a set back to lose 25 basis points on the day.
- EM: Emerging markets have traded on a leash against the Dollar today, reacting adversely to any swing in the greenback.
Discussion and Analysis by Charles Porter
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