US open – Italy, UK GDP, Gold, Oil

Markets tumble on Italian political risk

US equity markets are poised to open a little lower on Friday, tracking losses across Europe where more political woes in Italy have dragged on sentiment across the continent.

Source – Thomson Reuters Eikon

Political instability is nothing new in Italy but the risk of the coalition government collapsing appeared to have eased in recent weeks, giving the impression that we could be in for a relatively peaceful summer. How naive.

I don’t think anyone is surprised that we’re talking about a breakdown in the coalition again; people are probably more surprised that two parties that have little more in common that a mutual disdain for the EU, have held it together so long. The timing is the only surprising and unwelcome factor given everything else the markets are trying to come to terms with at the moment.

Naturally, Italian stocks – and in particular, banks – and bonds have been hardest hit but they are dragging everyone else down with them, albeit to a lesser extent. An election later in the year now looks very likely, with League hoping to capitalize on its surge in the polls following the European elections, when its coalition partner Five Star suffered the opposite fortune.

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GBP eyes 1.20 as possible recession looms

The UK could be heading for recession after the economy contracted by 0.2% in the second quarter, under performing expectations and coming at a terrible time given the proximity to 31 October. Heading into a no-deal Brexit in recession would be a nightmare scenario for Boris Johnson’s team and could further drag on the pound at a time when it is already in free-fall.

The reaction to the data wasn’t particularly positive either, with the pound now testing its recent lows and eyeing 1.20 against the dollar. Brexiteers may struggle to blame project fear as the PR battle with the People’s Vote campaign heats up so we can probably expect plenty of finger pointing at how badly Europe is performing and how the global slowdown is to blame.

GBPUSD Daily Chart

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Trade war calm welcome for oil

Oil is enjoying the reprieve from a few days without flare ups in the trade war. Prices have plummeted since the start of the month, as the conflict surprisingly escalated in the aftermath of talks in Shanghai, further heightening the risks to the global economy. Global central banks have been racing to cut rates and offer their economies some protection from the unavoidable knock-on effects although oil traders clearly don’t see it being enough.

WTI Daily Chart

Gold not shaken by rebound elsewhere

Gold looks on an unstoppable run recently, tearing higher during periods of risk-aversion and easing from various central banks. What’s been interesting is that any rebounds elsewhere have not been mirrored in gold, at best it’s paused. Clearly the environment is very favourable but it can’t travel in a straight line forever. We’re scaling six year highs already and during the two year period at the time, $1,520-1,560 was a very important area for gold. While there’s no shortage of momentum yet, it will be interesting to see if that continues as we enter into this zone.

Gold Daily Chart

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