(28 MAY 2019)DAILY MARKET BRIEF 2:EUR relief over, focus on Italian debt
The recent release of European elections results, although mostly feared by most investors, finally came in better than expected. Despite a loss of majority in the center-left and center-right coalition, it appears that anti-establishment parties’ gains came lower than anticipated while the greens and liberals also progressed, a rather good news for the single currency. Yet now that headlines are digested, it seems that investors are turning towards longer-term issues, including risk on Italian government debt, growth concerns, Brexit or potential US – EU trade war.
The EU budget monitoring process occurring along 5 June 2019 should see the Commission implementing the excessive deficit procedure against Italy as the assessment is likely to conclude that current structural deficit spending is approaching the 2.40% range instead of targeted 2% for this year and reach 3.60% by 2020 with current policy actions. Italy, the second largest debt-to-gdp bearing country within the EU after Greece could face fines that could reach as much as 0.20% of GDP, pushing interest-bearing costs higher amid rising bankruptcy risk. However, the timing of such an announcement might cause turmoil within EU parliament, as populist, eurosceptic parties could possibly hinder the period of distribution of executive powers, in a time where EU unity is essential.
Under current circumstances, we see little upside potential for the EUR, as ECB meeting is taking place on 6 June 2019. Currently trading at 1.1193, EUR/USD is heading along 1.1180 short-term.
