Euro Gains, Italian Bond Yields Fall on News of Budget Compromise


TALKING POINTS – EURO, EU, ITALY, 2019 BUDGET

  • Euro rose, Italian 10-year bond yields fell after news broke of budget compromise
  • Markets are eyeing upcoming European Council meeting from December 13 – 14
  • Investors likely cautious amid poor economic performance in Germany and Italy

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The Euro cautiously edged higher after news broke of a budget compromise brokered between Italian Prime Minister Giuseppe Conte and EU Commission President Jean Claude Junker. The new proposal now has the budget deficit at 2.04% of GDP, down from 2.4%. The spread between Italian and German 10-year bond yields narrowed by 5%. However, the fight may not be over yet.

Euro Cautiously Higher After Budget Announcement

Euro Gains, Italian Bond Yields Fall on News of Budget Compromise

German, Italian 10-year Bond Yield Spread Narrowed

Euro Gains, Italian Bond Yields Fall on News of Budget Compromise

Investors are likely holding their breath as they await the upcoming European Council meeting from December 13 – 14 for any key policy announcements that may shift the Euro and other European assets. A degree of caution may also still be hovering over investors shortly after British PM Theresa May was almost ousted through a vote of no confidence.

The dilemma in France over President Emmanuel Macron’s proposed 3.5% budget deficit may be used as ammunition by the Italian government to legitimize their fiscal radicalism. Granting an exception to France would likely be viewed as an example of Brussel’s favoritism to core countries over periphery member states, further stoking anti-establishment sentiment.

As it stands, Deputy PM Matteo Salvini is garnering more support at home according to several polls conducted over the past month. Meanwhile, support for his coalition partner Deputy PM Luigi Di Maoi’s Five Star Movement has been slipping against the backdrop of increasing internal fracturing. Uncertainty surrounding the final outcome of Italy’s 2019 budget is likely still looming over investors.

There is also the matter of slower economic growth in Europe with disappointing economic data coming from Germany and Italy. A concern for the latter’s performance may dwarf investor concern over the budget negotiations.

Italy’s economy contracted in the third quarter for the first time in four years, with further projections indicating slower growth in the state along with a gloomier outlook for global growth in 2019. Consequently, investors may be more hesitant to invest in European assets until the outlook becomes clearer. This will almost certainly exert downward pressure on the Euro until year-end and possibly into Q1 2019.

For further updates on global political economy and asset responses to geopolitical shifts, feel free to follow me on twitter @ZabelinDimitriwhere I frequently tweet updates before writing an article on it.

EURO TRADING RESOURCES

— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter





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