Political risk have again picked up in Europe prompting a stark sell of in Euro. In Italy the center-right coalition led by former Italian Prime Minister Berlusconi solidly won regionals elections in Sicily. With over 90% of the ballot counted, Nello Musumeci took 40% of the vote over 5-Star candidate Giancarlo Cancelleri impressive 35%. The elections was viewed by many as a litmus test for next year’s Italian national elections. The turnout for both antiestablishment parties’ indicates the reactionary vote remain influential. EURUSD bearish momentum continues hitting 1.1566 low.
Clearly the concern is fragmentation of the EU as Italians in poll have shown the highest dislike and preference to leave the EU of any member nation. However, a portion of the move should be attributed to broader FX risk aversion (migrating into USD), while equities continue to power ahead. Yet our midterm view this that European Union convergence has move past the “event horizon”. This unified union will be able to keep Italy in folds and therefore we would fade short-term risk volatility. This view, will be reinforced by further strengthening in the European economy. German Industrial production fell 1.6% in September greater then markets expectations of 0.9%. The slowdown can be attributed to broader weakness in European leading indicators after significant acceleration. We suspect the weak read will be short lived an ECB loose monetary policy and solid outlook for global economy will support output growth.
By Peter Rosenstreich