Daily Commentary BY THE CURVE TEAM –

Political Uncertainty In Europe Continues

29th of May, 2018

With holidays in the US and the UK overnight, the focus remained squarely on Europe, and in particular Italy, where the political situation is getting very messy. Meanwhile oil continued falling at the open yesterday as markets further factor in a likely increase in supply on the horizon.

The situation in Italy is deteriorating rapidly as the relationship between the coalition parties continues to breakdown.  The Italian President overnight vetoed an 82 year old EU skeptic from becoming economy minister which effectively ended the new government. He has, in it’s place, asked a former IMF official to lead a technocrat government.

Given both sides of the newly formed coalition refuse to play ball, a fresh round of elections seems inevitable. The election debacle in Italy is seen as a greater threat to EU stability than the recent French elections which at the time had markets on high alert.

The situation in Spain continues to fester away with a vote of no confidence in the government now widely expected which will in turn trigger more elections if it comes to pass.

The impact of the developments in Italy and Spain have so far been largely confined to European markets and the Euro, which fell heavily again overnight. However we have seen how quickly contagion can spread if you can cast your mind back to the European debt crisis earlier this decade.

Meanwhile the other main headline overnight was the continued fall in oil as markets reopened yesterday. Things have somewhat stabilised but the medium term outlook is still uncertain with the market looking for more clarity at the upcoming OPEC meeting next month.

While these events can seem distanced to what is happening here at home, their impact on volatility and uncertainty can weigh on the domestic economic environment both directly and indirectly.

David Flanagan

Director - Interest Rate Markets