(09 AUGUST 2019) DAILY MARKET BRIEF 1：Italian government coalition breakup becomes clearer

Working closely together for a period of 15 months, the Italian government run by the coalition composed of left-populist party Five Star Movement and far right Lega is on the verge of collapse. Although the end of the collaboration was largely expected and particularly following May EU elections major victory of Deputy Prime Minister Matteo Salvini and confirmed by most national opinion polls in his favor, the right-wing League political leader is expected to capitalize on recent victories to take the lead amid a stuck parliament. Yet major impediments remain as the timing for elections in August summer period as well as scheduled preparatory works for the 2020 budget in September are likely to hinder the prospect of elections. Dragging political turmoil in Europe’s third largest country would certainly not be a EUR-positive event, as investors are selling Italian government bonds.

Salvini’s plan to initiate elections would need the approval of numerous stakeholders. “Il Capitano” would require the support from Parliament to initiate a no-confidence vote in the government followed by a resignation from PM Giuseppe Conte. Additionally, Salvini would also have to convince Italian President Sergio Mattarella to dissolve parliament by assuring that a new government would be in place by October to draft the 2020 budget, thus putting the viability of the plan into question. Furthermore, another confrontation with the European Commission must not be ruled out as Matteo Salvini plan to hike deficit in 2020 from current 2.04% of GDP target in 2019 should certainly add up further torment in the Eurozone. The prospect of a potential government crisis in Italy is therefore not supporting European equities, which should close the week in negative territory for the second consecutive time. The reaction on the FX market surprises, with the single currency gaining traction despite the headline, partly influenced by Trump’s fresh salvo of comments on the Fed and the dollar.

Currently trading at 1.1205, EUR/USD appreciation should ease, heading along 1.1180 short-term.

By Vincent Mivelaz