Italy: Political uncertainty continues – Danske Bank

Analysts at Danske Bank note that political uncertainty continues in Italy as premier-designate Giuseppe Conte has given up forming a government after the Italian President Sergio Mattarella last night rejected the proposal for finance minister by the incoming government of Five Star and the League.

Key Quotes

“This raises the prospect for new elections, which would add to market anxiety towards Italy. Moreover, on Friday, Moody's placed Italy's credit rating on negative watch. This is likely to be negative for Italian government bonds when the market opens this morning. After the rejection of the euro-sceptic Paolo Savona as finance minister, there was some relief in the EUR/USD.”

“Recently, the market pricing of the first ECB hike has been postponed amid political uncertainty in Italy and the market adapting to a slow normalisation. On Friday, according to Reuters, ECB sources indicated that the growth moderation 3has not weakened the ECB's resolve to end a bond-buying scheme later this year but could make it more cautious about signalling interest rate hikes. The first 10bp deposit rate hike was postponed further and is now expected by the market in autumn 2019, and 20bp in spring 2020.”