Summary:

• Italian populist parties close to forming a government
• Leaked draft shows plans to defy EU rules on migration and debt
• Controversial debt plans weigh on Italian stocks and the Euro

 News that the political gridlock in Italy is set to come to an end has been met with a negative reaction in the markets after a leaked draft revealed plans to defy the EU rules on migration and debt. The two populist parties apparently close to a deal are the Five Star and The League and their alternative policies threaten to destabilize the bloc. One of the ideas in the draft is to demand the cancellation of 250B Euros of Italian bonds bought by the ECB.  

 Italian stocks have experienced some pretty strong selling today with the ITA40 down by almost 2%. Source: xStation

Luigi Di Maio, of the anti-establishment Five Star movement took a shot at the UK’s Financial Times after the press printed a story headlined “Rome opens its gates to the modern barbarians”, warning that Italy was on the verge of forming “the most unconventional, inexperienced government to rule a western European democracy since the EU’s founding Treaty of Rome in 1957.” 

The impact of this news can also be seen in the Euro, with the single currency falling lower against the vast majority of its peers. The EURUSD had earlier fallen below the 1.18 handle to trade at its lowest level since December. The market has been trending lower since breaking below prior support at 1.2155 following the ECB meeting last month, and is now not far from reaching its symmetrical target. The pair was in a prolonged period of consolidation for several months at the start of the year from 1.2155-1.2555 but after breaking below the lower bound it has now declined almost 400 pips – the size of the range again. 

 The EURUSD has fallen to its lowest level of the year and is not far from the symmetrical target of the breakout seen last month after the ECB meeting. Source: xtation