CAC Slide Continues as Italian Political Turmoil Worsens

The CAC index continues to spiral downwards and has posted four straight losing days. In the Tuesday session, the CAC is at 5440, down 1.24% on the day. On the release front, there are no major eurozone indicators and no French events. On Wednesday, France releases GDP, Consumer Spending and Preliminary CPI. The US will publish Advance GDP.

European stock markets are struggling, and the CAC index has declined 3.3% since May 23. The drama in Italy is dominating the headlines and spooking investors. The political crisis started on the weekend, when President Sergio Mattarella vetoed a ministerial pick of the two parties which were expected to form a coalition, the League Nord and the Five Star Movement. Mattarella rejected the suggestion of Paolo Savona as economic minister, given that Savona is a firm critic of the euro and supports Italy exiting from the eurozone. The reaction from the two parties was fast and furious, with claims that Mattarella was a puppet of Germany and the EU, and there were even demands for his impeachment. The prime minister-elect, Giuseppe Conte, has given up his mandate to form a government, and Mattarella has invited Carlo Cottarelli, a former IMF economist, to form a temporary technocrat government. This could mean that Italy will hold another election in the fall, unless there are more political twists and turns in this crisis.

The ECB is scheduled to wind up its massive stimulus program in September, but weak growth in the first quarter has raised speculation that the bank could decide to extend the program, a tactic it has often used in the past. Still, most analysts believe that the ECB will go ahead and terminate stimulus, but there is more uncertainty regarding future rate hikes. Higher oil prices and a weaker euro will likely mean that inflation is moving upwards, but core inflation projections, which ECB policymakers are most interested in, are expected to remain below the ECB inflation target of just below 2 percent. Investors will be keeping a close look at upcoming rate statements, looking for clues regarding the wind-up of the stimulus scheme.

  Italy: A Crisis in the making ?

Economic Calendar

Tuesday (May 29)

• 4:00 Eurozone M3 Money Supply. Estimate 3.9%. Actual 3.9%
• 4:00 Eurozone Private Loans. Estimate 3.2%. Actual 2.9%

Wednesday (May 30)

• 1:30 French Flash GDP. Estimate 0.4%. Actual 0.3%
• 2:45 French Consumer Spending. Estimate 0.4%. Actual 0.1%
• 2:45 French Preliminary CPI. Estimate 0.1%. Actual 0.1%
• 8:30 US Advance GDP. Estimate 2.0%

*All release times are DST

*Key events are in bold

CAC, Tuesday, May 29 at 6:25 EDT

 Open: 5466 High: 5480 Low: 5389 Close: 5440

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