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The result of the Italian parliamentary election appears to be a hung parliament, as earlier polls pointed to already. Anti-establishment parties such as the Five Star Movement and Northern League nevertheless registered strong gains, but none of the three major political blocs seem to be able to secure an outright majority (see chart). At the time of writing, the Five Star Movement was projected to get around 31% of the votes and the Northern League around 19%, whereas the PD party’s result disappointed with 20% (see chart).

At this stage it is difficult to say which party will get the mandate by the president to form a new government, but overall a grand coalition or centre-right coalition together with some smaller parties still seems most likely, in our view. Even in the case of a euro-sceptic coalition of Five Star and Northern League emerging, we still think that the actual euro exit risk is low. However, such an outcome would still be the most adverse one for markets, given the combination of reform roll-back and significant fiscal easing, which could bring Italy’s debt woes quickly back into focus

New elections cannot be ruled out

First coalition debates are likely to be starting behind the scenes already, despite the inconclusive result. The next important date on the election agenda is 23 March, when both houses of parliament will come together for the first time and speakers of the houses are elected, which is a necessary precondition for President Sergio Mattarella to start the formal consultation process aimed at forming a new government. After a deal is found, the new government has to secure a confidence vote in parliament, leaving us to conclude that it is unlikely that we will have a new Italian government in place before May or June this year. Should renewed coalition building efforts fail, new elections held in H2 18 cannot be ruled out either, in our view.

Markets await more clarity

The reaction in FX markets to the eurosceptic shift in Italy so far has been muted, as investors await more clarity on the composition of the next government. EUR/USD trades still around the 1.23 level at the time of writing and the muddy outcome should keep the cross in the recent range, in our view.

In the fixed income market, the Italian election is not a positive for the peripheral spreads this morning, but it is mainly an Italian ‘problem’. Hence, we expect Italy to lose relative to Spain and Portugal as well as the core EU markets. We expect the 10Y spread between BTPS and Germany to open up some 5bp wider on the back of the election result, and given the big gains for populist parties, it is difficult to see this as a positive factor for Italian government bonds going forward. That said, other factors are also at play such as the SPD joining Angela Merkel in a grand coalition in Germany, which will be positive for the EU. Hence, together with the centre-right coalition in Italy winning the most votes but without having a majority, this should limit the potential spread widening between Italy and Germany.

Daily Pivots: (S1) 1.2828; (P) 1.2871; (R1) 1.2924; More....

As noted before, considering loss of upside momentum in 4 hour MACD and proximity to 1.2919 key resistance, intraday bias in USD/CAD stays neutral first. On the downside, below 1.2757 resistance turned support will indicate rejection from 1.2919 resistance. Intraday bias will be turned back to the downside for 1.2614 support first. Nonetheless, firm break of 1.2919 will resume the rise from 1.2061 low and target 1.3065 fibonacci level

In the bigger picture, current development is reviving the case of medium term reversal after drawing support from 50% retracement of 0.9406 (2011 low) to 1.4689 (2015 high) at 1.2048. Break of 1.2919 will add more credence to this bullish case and target 38.2% retracement of 1.4689 to 1.2061 at 1.3065 first. Break will target 61.8% retracement at 1.3685. However, break of 1.2450 near term support will turn focus back to 1.2061 low instead.

The euro currency has reacted positively to the outcome of the weekend’s Italian election and German Referendum results. The EURUSD pair has so far hit an intraday high of 1.2364, as Sunday’s Italian election result showed no conclusive outcome, whilst Chancellor Angela Merkel found the support she needed as the German SDP Party backed her. Traders now look to the release of Eurozone Retail Sales and Investor Confidence data, with the 1.2305 level acting as a vital daily pivot or the EURUSD pair.

The EURUSD pair is intraday bullish whilst trading above the 1.2305 level, further upside towards 1.2364 and 1.2430 seems possible.

Should the EURUSD pair move back below the 1.2305 level, price-action may correct back towards the 1.2278 and 1.2259 support levels.

Daily Pivots: (S1) 0.7741; (P) 0.7757; (R1) 0.7777; More...

Intraday bias in AUD/USD remains neutral for consolidation above 0.7712 temporary low. Again, near term outlook will remain bearish as long as 0.7892 resistance holds. Below 0.7712 will resume the decline from 0.8135 and target 100% projection of 0.8135 to 0.7758 from 0.7988 at 0.7611. Break there will put 0.7500 key support in focus.

In the bigger picture, medium term rebound from 0.6826 is seen as a corrective move. It might still extend higher but we'd expect strong resistance from 38.2% retracement of 1.1079 to 0.6826 at 0.8451 to limit upside to bring long term down trend resumption. On the downside, break of 0.7500 support will now be an important signal that such corrective rebound is completed.

The USDJPY pair continues to consolidate at depressed levels, as risk-off trading sentiment underpins strength in the Japanese yen currency. Price-action is currently trading around the key 105.50 level, after hitting 105.24 on Friday, following U.S President Donald Trump’s promise to impose trade Tariffs sparked fears of a potential Trade War. Asian stock markets have suffered heavy losses in early Monday trading, putting further downside pressure on the risk-sensitive USDJPY currency pair.

The USDJPY pair retains a strong bearish bias below the 105.50 level, further downside towards the 105.24 and 104.90 levels appears possible.

Should the USDJPY pair move above the 105.50 level today, buyers may try to test towards the 105.90 and 106.18 resistance levels.

Daily Pivots: (S1) 1.2267; (P) 1.2301 (R1) 1.2351; More....

EUR/USD edged higher to 1.2363 earlier today but fails to sustain above 1.2354 resistance so far. Intraday bias remains neutral first. On the upside, above 1.2363 should extend the rebound from 1.2154 to retest 1.2555 high. Firm break there will carry larger bullish implication. On the downside, break of 1.2154 would revive the case of rejection by 1.2516 key fibonacci level and trend reversal. Outlook will be turned bearish for 38.2% retracement of 1.0339 to 1.2555 at 1.1708.

In the bigger picture, key fibonacci level at 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516 remains intact despite attempts to break. Hence, rise from 1.0339 medium term bottom is still seen as a corrective move for the moment. Rejection from 1.2516 will maintain long term bearish outlook and keep the case for retesting 1.0039 alive. Firm break of 1.1553 support will add more medium term bearishness. However, sustained break of 1.2516 will carry larger bullish implication and target 61.8% retracement of 1.6039 to 1.0339 at 1.3862.

A steady stream of Eurozone data will make its way through the markets on Monday. In political news, investors are still evaluating the outcome of Italy’s national election, which delivered a hung parliament with the anti-establishment Five Star Movement set to take top place.

IHS Markit will deliver a deluge of PMI data beginning at 08:15 GMT with reports on Spanish, Italian, French, German and euro-wide services activity. Eurozone services PMI is forecast to come in at 56.7; the Composite indication, which tracks services and manufacturing, is expected to come in at a solid 57.5.

On the PMI scale, anything above 50 signals expansion in economic activity.

At 09:30 GMT, Sentix will report on Eurozone investor confidence for the month of March.

The European Commission’s statistical agency will issue its monthly retail sales report at 10:00 GMT. Receipts at retail stores are forecast to rise 0.3% in January, which translates into a year-over-year gain of 2.2%.

Shifting gears to North America, Markit and the Institute for Supply Management (ISM) will each issue respective PMI reports for the month of February. ISM’s non-manufacturing PMI is forecast to ease slightly to 59.4 from 59.9 the previous month.

Earlier in the day, Caixin China’s services PMI showed a slight drop in the country’s non-manufacturing industries. The services PMI slipped to 54.2 from 54.7 in January.

EUR/USD

Europe’s common currency snapped back to health on Friday, rising more than 50 pips against the dollar to reclaim the 1.2300 handle. The EUR/USD exchange rate was last seen trading at 1.2323 for a daily gain of 0.1%. The pair is trading right around the 20-day moving average and faces immediate support at the psychological 1.2300 level. Economic data throughout the week will influence the direction of this pair, culminating in a report on US nonfarm payrolls on Friday.

GBP/USD

Cable extended losses at the end of last week, falling below 1.3800 for the first time in three weeks. GBP/USD was last seen hovering at 1.3789, where it was down around 0.1% from the Friday close. Cable is currently trading within a bearish channel marked by Brexit risks and a rebounding US dollar. In terms of technical levels, immediate support is located at 1.3750.

USD/JPY

The dollar-yen exchange rate opened the week in negative territory, extending last Friday’s sharp decline. The USD/JPY was down 0.2% at 105.48, its lowest since 2015. In terms of technical levels, the USD/JPY faces immediate support at 105.20, followed by 104.75. On the opposite side of the ledger, key resistance levels include 105.85 and 106.30. In addition to US data this week, the Japanese government will report on GDP and household spending. On Friday, the Bank of Japan will also deliver a rate verdict.

Headlines/Economic Data

General Trend: Asian equities trade mostly lower as steel makers remain weaker

Euro rises then pares gains amid release of Italy election results: No majority is expected (in line with prior market speculation), while support for Five Star Party rises

Precious metals outperform in the commodities space: Silver gains over 1%

Tuesday is a busy day for Australia: Q4 Current Account and Net Export Contribution expected to be released, along with Jan Retail sales and RBA decision

Japan bond yields decline amid drop in Treasury yields and rise seen on Friday after BoJ Gov Kuroda’s remarks

USD/JPY declines ahead of upcoming BoJ confirmation hearings

US Feb Nonfarm Payrolls and Avg Hourly Earnings data due for release on Friday, March 9th

Australia/New Zealand

ASX 200 opened flat: closed -0.7%

ASX 200 Utilities Index -2.3%, Materials -1.2%, Resources -1.1%, Financials -1%

Retail Food Good [RFG.AU]: Drops over 35% after reporting H1 impairment losses and declining to provide FY outlook

(AU) Australia Jan Building Approvals M/M: 17.1% v 5.0%e; Y/Y +12.0% v -0.6%e

(AU) Australia Q4 Company Operating Profit Q/Q: 2.2% v 1.5%e; Inventories Q/Q: 0.2% v 0.5%e

(NZ) New Zealand Treasury: Expects jobless rate to be broadly flat in 2018; evaluating several ways to estimate natural rate of unemployment

China/Hong Kong

Shanghai Composite opened flat, Hang Seng -0.2%

Hang Seng Telecom Index -1.8%, Financials -1.2%, Services -1.1%

Shanghai Composite Property Index rises over 1%, then pares some of gain

China Mobile [941.HK]: Declines over 2% as China announced plans to cut mobile internet rates and cancel mobile internet roaming fees.

(CN) China Feb Caixin PMI Services: 54.2 v 54.3e (first m/m decline since Sept); Composite: 53.3 v 53.7 prior

(CN) PBOC SETS YUAN REFERENCE RATE AT 6.3431 V 6.3334 PRIOR

(CN) China PBoC Open Market Operation (OMO): Skips v CNY90B injected combined in 7-day, 28-day and 63-day reverse repos prior: Net drain CNY100B v CNY20B drain prior

(CN) China sets 2018 GDP growth target around 6.5% v 6.9% growth rate in 2017 (as speculated); to maintain 'prudent and neutral' monetary policy and 'proactive' fiscal policy in 2018 – Xinhua

(CN) China commented on fiscal policy measures for 2018: To adjust minimum wage reasonably; To reduce tax in manufacturing and transportation industries; To cut taxes for enterprises and individuals by CNY800B; To cap end of 2018 outstanding sovereign bonds at CNY15.7T.

(CN) China commented on plans for property market in 2018: To push forward property tax legislation.

(CN) China comments on trade policy for 2018: Expects trade to show good trend amid stable development; To lower import tariffs on vehicles and consumer goods

Japan

Nikkei225 opened -0.6%; closed: -0.7%

TOPIX Iron & Steel Index -2.2%, Real Estate -2.1%, Electric Appliances -1.8%, Securities -1.6%

Japan mega-banks trade broadly lower

Steel and Auto Manufacturers extend losses amid trade protectionism concerns

Nikkei weighted Fast Retailing gains over 1% after reporting Feb domestic SSS +5.1% y/y

Japan Feb Services PMI: 51.7 v 51.9 prior; Composite: 52.2v 52.8 prior

Bank of Japan (BoJ) Dep Gov Nominee Wakatabe: Expects continued monetary easing to push up real wages; notes inflation is distant from 2% target and that Japan not fully out of deflation

BoJ Dep Gov Nominee Amamiya: Domestic economy making steady progress toward hitting BoJ's price goal; financial conditions have maintained stability

Looking Ahead: BoJ Gov Kuroda Upper House confirmation hearings set for Tuesday March 6th; The confirmation hearings for the Dep Gov Nominees (Amamiya and Wakatabe) set for March 7th

Korea

Kospi opens +0.2%

South Korea Finance Min: Reiterates not appropriate for government to intervene into Bank of Korea (BoK) interest rate decisions

In related news, Bank of Korea (BoK) Gov Lee-Ju-yeol is said to be reappointed for another term as central bank gov, according to a report released on Friday, March 2nd; If Lee is reappointed it would be the first time since the 1970s that a BoK governor was appointed to a 2nd term.

South Korea Special Envoy Chung: To deliver President Moon's strong will for denuclearization to North Korea [**Note: South Korea's President Moon is expected to send a special envoy to North Korea 'soon', said a local press report from March 1st]

South Korea sells 3-year government bond: avg yield 2.34% v 2.275% prior

Other Asia

(HK) Hong Kong Feb PMI: 51.7 v 51.1 prior

(IN) India Feb PMI Services: 47.8 v 51.7 prior (1st contraction in 3 months)

(SG) Singapore Feb PMI: 55.3 v 53.6 prior

North America

XL Group [XL]: Reportedly Axa is in late stage talks to acquire XL Group – press

Qualcomm [QCOM]: US Dept of Treasury CFIUS issues interim order to the company to postpone its March 6th annual stock holders meeting and postpone election of directors by 30 days

Looking Ahead: OPEC reportedly schedules meeting with US shale producers in Houston on Monday, March 5th - press

Europe

(IT) Italy Berlusconi led Centre-Right bloc seen leading 5-star in the Italian elections; suggests hung parliament (in line with final poll ahead of the elections from Feb 16th); Support rises for 5-Star party - exit poll

(EU) EC Pres Juncker: we are preparing import duties on US products; Confirms preparing import duties on Levi's jeans, Harley Davidson motorcycles, and bourbon

UAE Oil Min Al Mazrouei: No talks yet about extending OPEC production cut into 2019

Levels as of 01:00ET

Hang Seng -1.4%; Shanghai Composite -0.2%; Kospi -0.9%

Equity Futures: S&P500 -0.6%; Nasdaq 100 -0.5%, Dax -0.6%; FTSE100 -0.6%%

EUR 1.2299-1.2365; JPY 105.41-105.69; AUD 0.7740-0.7776 ; NZD 0.7206-0.7251

Feb Gold +0.3% at $1,327/oz; Feb Crude Oil +0.4% at $61.48/brl; Mar Copper -0.2% at $3.127/lb

Daily Pivots: (S1) 1.3763; (P) 1.3789; (R1) 1.3824; More....

Intraday bias in GBP/USD remains neutral for consolidation above 1.3711 temporary low. Near term outlook is still mildly bearish with 1.4144 resistance intact. Correction from 1.4345 would extend to 1.3651 resistance turned support and below. At this point, such fall is viewed as a corrective move. Hence, we'll look for strong support from 38.2% retracement of 1.1946 to 1.4345 at 1.3429 to contain downside and bring rebound.

In the bigger picture, as long as 1.3038 support holds, medium term outlook in GBP/USD will remains bullish. Rise from 1.1946 is at least correcting the long term down from 2007 high at 2.1161. Further rally would be seen back to 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466. However, GBP/USD fails to sustain above 55 month EMA (now at 1.4259) so far. Break of 1.3038 support, will suggest that rise from 1.1946 has completed and will turn outlook bearish for retesting this low.

Daily Pivots: (S1) 0.9333; (P) 0.9378; (R1) 0.9419; More...

At this point, USD/CHF is still staying above 0.9321 support and intraday bias remains neutral first. On the downside, On the downside, break of 0.9321 will indicate completion of the rebound from 0.9186. Intraday bias will be turned back to the downside for 0.9186 first. Break will resume larger down trend to 0.9115 projection level. On the upside, break of 0.9490 will revive the case of near term reversal, on bullish convergence condition in 4 hour MACD. In that case, outlook will be turned bullish.

In the bigger picture, fall from 1.0342 is seen as a medium term down trend. Deeper decline should be seen to 100% projection of 1.0342 to 0.9420 from 1.0037 at 0.9115. Break will target 161.8% projection at 0.8545. In any case, sustained trading above 55 day EMA is needed to be the first sign of medium term reversal. Otherwise, outlook will stay bearish even in case of strong rebound.