DAX Slides as Italy Gripped in Political Crisis

The DAX has posted sharp losses for a second straight day. In the Tuesday session, the DAX is at 12,667, down 1.52% on the day. In economic news, there are no major eurozone or German indicators on the schedule. Wednesday will be busy, as Germany releases retail sales and Preliminary CPI. The US will publish Preliminary GDP.

The worsening political crisis in Italy sent Asian markets lower on Wednesday, and European stock markets are also in red territory. The DAX has plunged 2.6% so far this week and is currently at its lowest level since May 2.  The drama 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. Predictably, the response from the two parties was harsh, 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 Crisis Pounds EUR, More to Come

Economic Fundamentals

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)

• 2:00 German Retail Sales. Estimate 0.5%
• 2:00 German Import Prices. Estimate 0.7%
• All Day – German Preliminary CPI. Estimate 0.3%
• 3:55 German Unemployment Change. Estimate -10K
• 8:30 US Preliminary GDP. Estimate 2.3%

*All release times are DST

*Key events are in bold

DAX, Tuesday, May 29 at 5:55 DST

Open: 12,786 Low: 12,803 High: 12.608 Close: 12,667

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