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Political uncertainty points to lower start in Europe

Political uncertainty is weighing on sentiment in Spain and Italy, and the difference between southern and northern Europe is becoming clear once again. 

To an extent the negative sentiment in the south is weighing on the north. Given that the UK and US markets were shut yesterday for holidays, we could have seen even larger losses in southern Europe.

The Five Star Movement and Lega party won’t be forming a coalition after the Italian President blocked the nomination for finance minister. Carlo Cottarelli is to be installed as the care-taker Prime Minister. The aim of the move is to provide some political stability to Italy in the short-term. There is talk there could be another general election at the back end of the year, or in early 2019. Opinion polls suggest the Five Star Movement and Lega party would gain more ground as populist sentiment is still growing. Investors are becoming even more nervous about the state of Italian politics, and the government bond yields are rallying, while stocks are under major pressure. 

Mariano Rajoy, the Spanish Prime Minister, is on thin ice, and risks losing his job as a vote of no confidence will be held on Friday. Spain is also enduring political uncertainty, and depending on Friday’s outcome, there could be a snap election in the near-term.

The political uncertainty in the eurozone could not have come at a worse time as the region is going through an economic soft patch. Headline and core inflation slipped back, which points to falling demand – the direct opposite of what the European Central Bank want. The services PMI reports from France and Germany not only undershot economists’ expectations, but they showed a slowdown in the growth rate too.

Last week’s Federal Reserve update was a little on the neutral side. Going into the meeting traders were anticipating the US central bank to lay the ground work for three more rate hikes this year. Dealers are widely expecting an interest rate hike next month, but beyond that, investors are a little uncertain. Last week the US dollar took a breather on the back of the Fed’s update, but the upward trend has been resumed. The non-farm payrolls report on Friday will be closely watched, as it could provide clues as to what the US central bank will do at the end of the year. The earning figures will be of particular importance as we would need to see a steady growth in earnings in order for the Fed to justify tightening their monetary policy at a faster pace than previous years. 

The oil market took a dive at the end of last week after it was reported that Russia and Saudi Arabia are considering easing up on the production freezes. OPEC will hold a meeting next month, and dealers are preparing themselves for the possibility of production being increased. The oil market has been in a strong upward trend for one year, and recently we saw the market hit 42 month highs. The announcement from Saudi Arabia and Russia has disrupted the oil market.

EUR/USD – has lost a lot of ground since the middle of April. If it remains below 1.1670 it could pave the way for 1.1554 to be tested. Bounce backs might run into resistance at 1.1829, and if that level is cleared, it might target 1.1996. 

GBP/USD – remains in its downtrend since mid-April and if 1.3300 is broken it could target 1.3200. A move above 1.3450 might bring 1.3573 – the 200-day moving average into play.

EUR/GBP – has been edging lower throughout May, and if the bearish move continues it could target 0.8680. A move above 0.8845 would be needed to negate the recent bearish move.

USD/JPY – has pulled back after a two month rally, and if it remains above the May low of 108.65, it might retest 111.39. A move below 108.65 could bring 108.00 into play.

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