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Italian Political Fears Become A Global Theme

The Italian political crisis continued to spook investors well after the European session ended on Tuesday as fears over the unfolding political turmoil jumped across the Atlantic for the first time. Big banks dropped the hardest, struck by a double whammy of investors trying to suss out which lenders are capable of surviving a fresh eurozone storm; in addition to being hit by lower US bond yields as investors brought into safe haven treasuries. A lower yield environment is considered less profitable for the banks, a sector which dived as the US 10-year bond enjoyed its biggest rally since the Brexit referendum in 2016, sending yields 15 basis points lower to 2.78. The latest action has put the recent 4 year high of 3.08% 10yr yields into the history books, at least for the time being.

The S&P closed 1.2% lower whilst the financial sector shed 3.4%, as the likes of Citibank, JP Morgan, Bank of America and Morgan Stanley closed 4% lower.

Italy ‘s political turmoil on a global stage
The interim Italian Prime Minister Carlos Cattarelli failing to present a finalised list of ministers to the Head of State Sergio Mattarella doesn’t bode well, nor does the warning from the Italian central bank chief that Italy could be on the brink of losing investors trust, both moves that sent jitters through the markets. The heavy sell offs on Wall Street spilled over into Asia overnight and is expected to land once again on the shores of Europe as trading begins on Wednesday. The FTSE MIB is set to extend its 2.6% losses from the previous session, putting it inline for a weekly loss so far of 4.6% and a monthly loss of almost 11%.

Hope now rests with a late-night twist from the populist 5 Star Leader, Di Maio who looked to revive talks with the League in a new attempt to form a government and avoid a rushed return to the polls. If the markets consider this to be a credible move, then we could see the sell off start to bottom out.

EUR/USD Sub $1.15 on US PCE & GDP Data?
The euro has taken a beating, diving to a 10-month low of $1.151 whilst Italian treasury yields soared the most in a single session, since records began in 1996 on Tuesday. Today investors will remain wary of any further developments in Italy, however an eye will also be cast towards the busy economic calendar. German Inflation data could help lift the common currency in early trade, whilst attention will turn towards the US GDP and PCE reading in the afternoon.

Today’s figures are expected to confirm robust economic growth and a PCE index that is firmly above 2%, keeping the Fed anchored on the gradual interest rate rise path. The probability of a June rate hike has eased slightly, moving back from almost a dead cert a few weeks earlier. A surprise to the upside, combined with further political turmoil in Italy could see the euro slip below $1.15 on its next attempt.

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