Italian Political Crisis Eases, Risk Assets Rebound

 

Markets Bounce Bank from Italy Uncertainty

A sense of relief was felt within financial markets today as the rush to safe haven assets that dominated yesterday’s session eased considerably.  Much of the market anxiety was attributed to the political instability in Italy, which was somewhat lessened today after Italian President Sergio Mattarella revealed that he would consider reviving a coalition government.  Mattarella’s intention to include the two populist parties in the center of the current crisis (5 Star Movement and the League) stands to hopefully diminish the potential for fresh elections this August.  As a show of good faith, Paolo Savona, the former populist party selection for economy minister who was vetoed by Mattarella, was informed that he could participate as a member of the government, however not under the position he was initially nominated for.  The uncertainty is still far from resolved in Italy, and financial markets will seemingly continue to trade off of headlines out of Rome.

 

 

All three major US stock indices posted a strong, broad-based rebound during today’s trading session, as the S&P 500 and DJIA climbed 1.25% (biggest daily gains in more than three weeks) while the Nasdaq rose 0.9%.  Treasury yields/swap rates retraced nearly half of yesterday’s movement, increasing 5-10bps across the curve as the 10-year note yield jumped to 2.86% (+7.5bps).  Also in line with the reversal of yesterday’s activity, the US dollar fell from a 6-month high as it declined 0.7% against major currencies, with the Canadian dollar surging as much as 1.2% after a hawkish announcement from the nation’s central bank.

 

 

GDP Revised Lower

The Commerce Department’s second estimate of Q1 GDP growth missed expectations this morning, reported at +2.2% vs. 2.3% expected.   Much of the weakness was attributed to consumer spending, which was revised down from 1.1% to 1% (estimate 1.2%) growth.  The consumer spending figure, which accounts for about 70% of the US economy, was the lowest gain since 2013.  There were also downward revisions to inventories, residential fixed investments and exports, while spending on business equipment was revised upward – perhaps reflecting some of the benefits of the new tax plan.  Overall, today’s level represents the best first quarter GDP number since 2015, although it did not meet the lofty expectations of the administration where President Trump has set 3% sustained GDP growth as the goal for the US economy.