Three parties in Mario Draghi’s coalition turned their back against him at yesterday’s confidence vote, meaning that Mario Draghi will resign again, today. Draghi’s resignation means early election in fall in Italy, and political chaos at least until then.
And unfortunately, Mario Draghi’s resignation will have a broader impact than just in Italy. Italy is the Eurozone’s third biggest economy, and the fact that the country will sink into political chaos comes as an additional layer of stress for the European Central Babk (ECB), which is already having hard time to contain the divergence between the Eurozone yields.
That divergence should be contained, however, if the ECB wants to increase its interest rate to address the rising inflation. If it doesn’t, and if some European yields rise significantly more than the others as a result of higher interest rates, it would trigger another debt crisis in Europe.
The spread between the Italian and German 10-year yield has been widening since the start of the year. So, all eyes are on what Christine Lagarde thinks about the latest developments in Italy, and what she proposes against antifragmentation.
The ECB meets today, and not only it is expected to announce the first rate hike in Europe since 2014, but it will also reveal an antifragmentation tool, that should, in theory prevent the spread between the core and peripheral yields to go much wider.
Europe needs a solid tool to deal with the mess.
Nord Stream 1 should be back
Good news is that the Russian President Vladimir Putin said that the gas flow to Europe will be restored via the Nord Stream 1 pipeline today, but took the opportunity to warn the Europeans that the gas flow will be tightly curbed until the problems with the sanctioned turbine parts are resolved.
The European gas futures eased, and the EURUSD advanced past the 1.0270 yesterday on the back of a broadly softer US dollar, encouraging news from the Nord Stream 1, and the rising expectation that the ECB could opt for a 50bp hike today, rather than a 25bp hike.
It’s a no brainer that the ECB must go bigger than a 25bp hike today, if it wants to have an impact on the rising inflation. But will it be capable of doing so on a continent ravaged by pandemic, a war and now political chaos, is another question.
A 25bp hike will certainly send the EURUSD back below parity, while a 50bp hike could keep the single currency’s head above water for some more time. But the euro will likely remain under pressure, as long as the threat of a renewed euro zone debt crisis, and further energy crisis remain.
Gold sinks below $1700 per ounce
Gold slipped below the $1700 per ounce on the back of waning geopolitical tensions. In the absence of news that would trigger massive safe haven flows, the yellow metal should continue its journey to the south.
It is also said that if Janet Yellen is successful in forcing Russian oil exporters to accept $40-$60/bbl to sell the Russian oil, gold could tumble to the $1400-$1300 support zone. But don’t get too scared yet, there is more chance for the oil price cap to backfire than to be accepted.
In the US
Oil bulls are much less ambitious about buying oil above the $100 per barrel. The barrel of American crude is back to $101 this morning, and the limited upside seems to be giving an energy boost to equity markets, along with some good earnings announcements.
The S&P500 posted its first back-to-back gains in almost two weeks and Nasdaq gained the most with a 1.58% advance as Netflix jumped 7.35% on the back of less disappointing quarterly results.
Tesla, on the other hand, announced better than expected earnings after the bell. As Netflix, the Tesla results were worse than the previous quarter. The company announced the first sequential decline in profit since the end of 2020, but revealed that it nailed the highest vehicle production in its history despite the shutdown of the Shanghai mega factory due to the Covid restrictions and maintained its annual production growth target unchanged at 50%.
What was less encouraging in the Tesla report is the update regarding its Bitcoin holdings. Tesla apparently sold a big chunk of Bitcoin to add near a billion dollar to the company’s balance sheet. No wonder the news reversed the positive momentum and sent Bitcoin back below the $23K mark yesterday.
