Italian Elections and the Future of the Euro
Total disappointment, bordering on total disbelief, in the Italian elections saw investors run for cover and widespread cutting of major “risk positions” in the euro and its crosses. Despite some stabilisation this morning, where the euro has tried to stage a fight back, the prevailing penchant to sell any rallies remains.
A timely reminder perhaps that the Euro Zone is far from out of the woods, with the lack of enthusiasm for austerity and reform (and Spanish and Greek debt problems rearing their ugly heads again of late) adding to the high level of political uncertainty and likely to cause wider and more volatile government bond spreads, thus weighing on the single currency in the coming weeks/months.
EURJPY was the catalyst as it collapsed circa 5% at one stage as “risk” trades, funded in the Yen, were unwound causing stops galore to be triggered and order books at large market making banks to be “cleaned out”.
Today’s market has a nervous, uneasy feeling that is being played out through knee-jerk reactions on thinner than usual liquidity and a tendency for wider spreads , as can be the case after such disorderly moves.
So, to Italy, where Mr Berlusconi’s most popular election promise of offering to refund the property tax imposed by the previous Monti government, threatened at one point, to bring about one of the most unlikely comebacks. What we have, in fact, is most likely the worst possible outcome. No party is able to form a government, more elections are likely to be in the pipeline and uncertainty (the thing risk takers and markets seem to like the least) reigns. Coalition(s) will need to be formed and deals will have to be done – with Signor Bersani more likely to favour an alliance with Grillo than Berlusconi, but Grillo stating co-operation with Bersani is not something he would consider, and Berlusconi just glad to be back in the limelight and the thick of things and likely to be open for a hook up with anybody! And all this in a country that is the third largest economy in the Euro zone, and where politicians have not exactly covered themselves in glory in the past.
All of a sudden, the new found “OMT” optimism towards the single currency of early January seems a lifetime ago, with Euro firmly back in the spotlight and “safe havens” once again being actively sought out. Expect many column inches to once again be dedicated to subjects such as “peripheral yields” and be wary of comments emanating from the European powerhouse Germany regarding the need to continue down the austerity and reform path that won’t exactly be met with open arms south of the Brandenberg Alps.
For EURUSD 1.3700 seems a distant memory and those who were getting excited about 1.40 and beyond, will be cursing their luck and now talking about 1.20, such is the nature of the market.
In reality 1.3000 is likely to be a key pivotal level and with the FED likely to remain on the dovish
side of the tracks, talk of re-testing last summer’s lows seem to me to be premature. Expect to see intraday stops filled on any break above 1.3130 but meet fresh sellers on any upticks to 1.3200/50 area, with a break below 1.3000 opening up 1.2910 and possibly leading to a test of 1.2840 support area, which may be deemed to offer “value” and be well defended.