(17 December 2019)DAILY MARKET BRIEF 1:Italian politics should soon weigh on the EUR

As investors are slowly preparing for end-of-year holidays and trading activities are set to decline in the coming days, investors remain majorly concerned by current broader risk events such as the Sino-American trade discord or Brexit. Yet the rather stable development of the single currency seen since the 12 September 2019 European Central Bank decision to cut rates and resume with asset purchases could well be tarnished by upcoming regional elections held in Italy in eight regions starting from late January 2020. The latter could well confirm a resurgence of right wing political parties as well as destabilize Giuseppe Conte’s second government coalition backed by the left-populist Five Star Movement and the centre-left Democratic Party (PD).

With an economy close to stagnation with 3Q GDP maintained at 0.30% after closing in technical recession two times since December 2018, supported by private consumption amid improving labor conditions although manufacturing activities is still maintained in contraction since October 2018, it appears that the room of maneuver for the 3-month old new coalition stays scarce. Despite the surprising proliferation of the “Sardines” movement that should play a strong opposition role against Salvini’s Lega and far-right coalition, it seems that political tensions should remain tense. While Conte’s government effort mainly consists of drafting a 2020 annual budget that would help gain sympathy from the European Commission instead of consolidating a common program, Italian politics might well weigh on the Eurozone in the prospect of a major defeat of regional votes and particularly in the Northern Emilia Romagna region, an historical stronghold of the leftists. While risks of seeing the PD quitting the central government is rising after a major defeat, it seems that early elections are likely to take place in 2020, before the official deadline of 28 May 2023.