(14 NOVEMBER 2018)DAILY MARKET BRIEF 2:Italy dampens Euro

Despite warnings from the European Commission, Italy’s government is sticking to its proposed budget – which sports a deficit of 2.40% of GDP, i.e. USD 50-80 billion. If the coalition sticks to its promises of a minimum income for the poor, a flat tax rate of 15-20% and a pension reform, Italian treasury yields will keep rising and the budget simply will not add up. For now, investors remain cautious, as 10-year BTP-Bund spreads remains their highest in 5 years, at 3.53%. The situation is also pushing EUR/USD downward, heading toward 1.1250.

We assume the single currency is not immune to another shock. There is a high likelihood that the EU won’t implement sanctions short-term, as this would fuel anti-EU passions and add additional pressure on the single currency. However, the Italian government might back down on its full plan. The European Central Bank’s reaction is unclear, but supporting Italy would be counter to its monetary normalization path.