Mon, May 29, 2023 @ 23:03 GMT

Italy Turns Right

Market movers today

A fairly quiet start to the week in terms of economic data, German September Ifo is expected to decline further in line with the PMIs released last Friday.

Markets will also focus on several central bank speeches throughout the week following the September meetings. Today, ECB’s Lagarde, de Guindos and Panetta as well as Fed’s Bostic and Mester will be on the wires.

Later in the week, we will get the Euro Area Flash HICP on Friday, which is expected to accelerate further. Official Chinese PMIs and US private consumption expenditures will also be released on Friday.

This morning we published our latest global update Big Picture – Chilling prospects for the global economy, 26 September. The German economy is very likely to fall into a recession already this year, while the euro area is also at risk. The US economy is seeing a near-term recovery, but tight financial conditions will increasingly weigh on the economy, leading to a mild recession in H1 2023. Thanks to policy stimulus and waning COVID-19 lockdowns, the Chinese economy will grow slightly above 5% in 2023. Risks to growth are clearly tilted to the downside from higher than anticipated inflation and more abrupt and prolonged policy tightening, especially in Europe.

The 60 second overview

Italy: Italy’s election brought a resounding win for the right-wing coalition of Brothers of Italy, League and Forza Italy gaining about 44% of the vote, enough for a majority in both chambers of parliament (but falling short of a super majority that could have triggered constitutional changes). With the election outcome broadly in line with previous polls, the market reaction was muted and markets will now focus on the composition of the new government (especially the crucial finance ministry) which will likely not be in place at least until end October. A technocratic finance minister would help calm market fears about fiscal expansion, as would reassurances that the new government will continue to abide by EU fiscal rules. However, a difficult balancing act awaits, just as Italy is heading into the crucial 2023 budget season, with a slowing economy and calls for additional support for households and firms growing louder. Any attempts for big revisions to Italy’s recovery and resilience plans and accompanying structural reforms will be seen as negative by the market, as it could endanger continued NGEU fund disbursements and any future activation of the ECB’s TPI programme.

UK: UK Chancellor Kwarteng presented a tax cut package estimated at GBP 45bn (2% of UK GDP), making it the biggest tax cutting event since 1972. The UK economy already struggles with high inflation and a large current account deficit – tax cuts are likely to make matters worse in the near-term.

Equities: Equities in another steep drop Friday, bringing MSCI World down 4% last week and close to 20% lower year to date. VIX in a big jump higher to 30 and investors offloading risk across asset classes. Noteworthy, oil plunging and taking the energy sector down more than 6% Friday. Growth quality and Min vol outperforming but not in a full blown recession way as yields are not mowing lower. The sell-off last week initially triggered by higher yields not least in the US, but the Friday sell-off rooted in massive FX moves away from sterling and into especially the dollar. As UK announced another round of massive fiscal stimulus, UK gilt yields explode upwards, CDS spread widened and the energy crisis suddenly got a new layer of confidence crisis. Negative spill-over to with Dow -1.6%, S&P 500 -1.7%, Nasdaq -1.8%, and Russell 2000 -2.5%. Asian market in red this morning across the region while both US and European futures are lower.

FI: Global rates were in the hands of the UK on Friday amid the mini-budget presented by Chancellor Kwarteng. 5-10y Gilts led the sell-off (5y Gilts were 50bp higher on the day) that left the 5y and 10y EUR swap higher by 12bp and 8bp respectively, while the 30y point was broadly unchanged on the day. The 5s30s EUR swap curve is at record inverted levels at -77bp (-11bp on Friday).

FX: GBP fell sharply on Friday after UK announced tax cuts of 2% of GDP. EUR/GBP rose above 0.89. EUR/USD dropped below 0.97 and EUR/SEK came close to 11.00 level.

Credit: Credit markets closed a volatile week significantly wider and CDS indices trade at levels similar to spring 2020. Friday continued the weak risk sentiment with iTraxx Main 4.9bp wider to 130.4bp and iTraxx Crossover 18bp wider to 637.2bp.
Nordic macro

Nothing on the agenda in Sweden today, but later during the week we will get the minutes from the Riksbank meeting last week, where the board decided to hike the rate by 100bp but otherwise sending a rather dovish signal with a relatively flat rate path and continued QE reinvestments during Q4. The week is also full of Riksbank speeches starting Tuesday (Ingves, Jansson, Ohlsson and Flodén). In terms of data, we will especially focus on the NIER survey on economic confidence released on Wednesday. Consumer confidence is at the lowest level since early 1990s as rate hikes, energy prices and inflation erodes purchasing power. Manufacturing confidence has so far held up well but we have started to see signs of a deterioration which we expect to continue.

Danske Bank
Danske Bank
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