Italian political risks are likely to re-emerge at some point – Scotiabank

Analysts at Scotiabank explained that market sentiment has improved significantly today as Italian political fears have receded – for now, at least.  

Key Quotes:

“New elections seem most likely now, with a caretaker government in charge in the interim. A successful 5- and 10Y BTP auction today helped further calm market concerns and lift peripheral bonds sharply (Italian 10Y yields fell 21bps, Greece down 17bps).”

“European stocks have steadied after Asian markets weakened in line with US markets.”

“In the G-10 FX space, the USD has softened against most of its major peers but the relaxation in tensions is more fully reflected in the overall under-performance in the JPY.”

“European currencies are broadly higher and the EUR looks more comfortable with gains getting additional support from stronger German regional inflation data.”

“The MXN is experiencing a small relief rally as market volatility seems to have peaked for now. Banxico releases its inflation report today.”

“Italian political risks are likely to re-emerge at some point and markets still have to contend with the risks stemming from the US’ trade and foreign policy, which seem inextricably and uncomfortably linked at the moment.”

“We think the USD looks significantly over extended in the near -term at least now, however, and we retain a dimmer view of prospects in the longer run from a cyclical, structural and secular trend perspective.”