Colosseum

After the steep sell off seen earlier this week in Europe we saw a modest stabilisation for markets in Europe yesterday as investors adopted a “wait and see” approach as to what might happen next with respect to events in Italy.

While we saw some fairly decent gains across the board it was notable that while banking stocks rebounded the gains were fairly minor when compared to the losses of previous days, despite Italian bond yields falling back sharply from their big gains on Tuesday, on the back of a fairly decent bond auction as well as hopes that we still might yet avoid new elections and get some form of mandate for a new administration.

This optimism was reinforced by a call from the Five Star movement for Paolo Savona to withdraw his candidacy for the position of finance minister. This would appear to be at odds with the position of the League and its leader Matteo Salvini, whose pick Savona is. The differences of opinion between the two parties certainly don’t bode well for any future relationship in government, if Salvini does change his mind about Savona and put someone else forward as finance minister.

For now, hopes of some form of agreement in the coming days has prompted US markets to reverse all of their losses of the previous day to close strongly higher with the Russell 2000 hitting a new record high, and look set to translate into a positive open as we come to the end of a difficult month for Italian financial markets.

Even though investors have significant concerns about the recent steep rise in Italian borrowing costs it should be noted they still remain well below their long-term averages prior to the financial crisis, when they were on average in and around the 4% level for most of the noughties. This means that while Italian borrowing costs now are high relative to the last few years, they still remain low by historical standards.

While events in Italy appear to be in pause investors still have to contend with the looming deadline of the US tariffs waiver for the EU on steel and aluminium tariffs, which expires tomorrow, as well as the ongoing negotiations with respect to Nafta and China trade.

On the data front we’ve seen inflation in Europe remain fairly subdued over the last few months with core prices just above the all-time lows of 0.6% at 0.7%. Even the headline CPI number has struggled to show any signs of significant upside, despite oil prices which have risen by over 70% since the middle of last year.

Despite this rise in oil prices central bankers have appeared to come across as fairly relaxed about the prospects for higher prices, however this could be about to change if yesterday’s CPI numbers from Spain and Germany for May are any guide. These showed sharp rises in the headline numbers from 1.1% and 1.4% respectively in April. Spain CPI jumped to 2.1% while German CPI rose to 2.2% matching its highest reading since February last year.

If these rises in the May numbers are matched by today’s French CPI numbers as well as the headline EU CPI number then we could well see a sharp rise in price pressures in the next few months, something that could well be exacerbated by the recent decline in the euro from its highs earlier this year.

French CPI is expected to rise from 1.8% to 2.1% in May while the broader EU measure could see a much sharper rise than the 1.2% to 1.6% rise that is expected. Core prices are also expected to recover from their 0.7% lows to edge back up to 1%.

In the UK the latest lending numbers are expected to show a pickup in consumer credit of £1.3bn for April after the weather-related March slowdown of £0.3bn. Mortgage approvals for April are also expected to pick up slightly to 63.5k.

EURUSD – rebounded from the 1.1500 level yesterday which is also trend line support from the December 2016 lows at 1.0340. A move below this key support could well open up a move towards1.1360. While above 1.1500 the potential is for a rebound towards 1.1730.

GBPUSD – found some support at the 1.3200 area with broader support just below that at 1.3110 trend line support from the January 2017 lows. Resistance now comes in at the 1.3360 area, with a break retargeting the 1.3460 area.

EURGBP – found support just above the 0.8690 area which could prompt a retest of the trend line resistance at 0.8780 while just above that we have the 100-day MA just below the 0.8800 level.

USDJPY – has continued to drift lower with potential to head towards the 107.40 area. We need to see a recovery back above the 109.80 level to stabilise.

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