(25 SEPTEMBER 2018)DAILY MARKET BRIEF 2:Italian budget won’t break Euro bank

Budget talks in Rome end on Thursday, and there is risk that it could exceed investors’ expectations, putting additional pressure on the Euro. Early September estimates were 1.50% of GDP; recent estimates are 2% - still below the EU’s 3% limit. Accordingly, we expect minimal impact on the EUR, as long as the 3% threshold is not breached. A 2% budget will be positive for Italian assets. Trading along 1.1742, EUR/USD is expected to approach the 1.1720 range short-term.

Is the budget realistic? Considering that Italy remains the second largest debt-bearing country (as a % of GDP) after Greece and 24% of its borrowings come from Eurozone states, we expect further opposition from the EU, which will either reject the spending plan or ask for looser fiscal policy, i.e. lower spending. Here’s a wild card: Italy’s ruling coalition is willing to implement a 15% flat tax and increase welfare for poor across the country.

By Vincent Mivelaz