(01 APRIL 2019)DAILY MARKET BRIEF 2:Italy under water as ongoing crisis weighs on the economy

The Italian crisis saga is not over. The economy has consistently grown at a slower pace than the euro zone due to structural inefficiencies while heavy pressures induced by the European Commission with regard to the budget deficit target is expected to resume in 2H 2019. Yet a break-up of the ruling anti-establishment 5-Star Movement and right-wing League following European elections starting in 23 May 2019 would be seen as a positive headline as most polls favor a centre-right majority.

Despite a major slowdown of the Eurozone globally, it appears that Italy remains one of the most exposed country within the single market. The debt is second-highest after Greece, with a debt equal to 132.10% of GDP, while a risk of rating downgrade would put additional pressure on already vulnerable Italian banks. Indeed, Italian government bonds heavy reliance on domestic demand and more specifically Italian banks (along 10%) poses further worries. The potential overshoot of the 2.04% of GDP deficit target (estimated above 3%) could not only prompt up sanctions from Brussels but also trigger a wave of rating downgrades, which should ultimately weigh on Italian banks whose reliance on Italian state creditworthiness is at its peak. Overall, the Italian economy is expected to show a slight recession in 1Q 2019 while a rebound in the automotive industry and exports to China as well as ECB monetary policy should provide short-term support for Q2. However, impending confrontation with Brussels as well as autumn rating agency credit assessment should weigh on the economy in 2H 2019.

Currently trading at 1.1245, EUR/USD is heading along 1.1256 short-term.