The Market Today
Italian Drama Grips Investors Globally
by Craig Dismuke, Dudley Carter
Home Prices and Consumer Confidence, but Geopolitical Tensions Loom Heavy: Today’s economic calendar will bring the S&P CoreLogic Home Price report for March. Expectations are prices rose another 0.75% MoM bringing the YoY rate of price gains to 6.4%. At 9:00 .am. CT, the Conference Board’s report on consumer confidence is expected to show a slight pullback, but with confidence remaining very high. The economic calendar heats up tomorrow with the ADP employment report following on Thursday by the April’s PCE inflation data, personal income and spending. The big news of the week, however, will be Friday’s May labor data (payrolls expected to grow 190k, unemployment rate hold at 3.9%, and average hourly earnings stick at 2.6%). Even with the ever-important jobs data, the markets may well be more focused on geopolitical events than the U.S. data (see below for more).
Overnight – Turmoil in Italian Assets Foils U.S. Investors’ Attempt to Ease Back In from the Holiday Break: U.S. markets returned from the Memorial Day break to a hostile trading environment for risk assets. Ongoing political uncertainties in Europe weighed on markets Monday (more below) and are the primary driving force behind Tuesday’s weakness in equities, a sell-off in Italian government bonds, and a six-week low for longer Treasury yields. Developments over the last 24 to 48 hours have made snap elections likely in Italy over the next several months and have called into question the stability of the current Spanish Prime Minister. Investors have sold government bonds of both countries into that narrative, but a triple-digit basis points increase in the short-end of the Italian sovereign curve is most eye-catching. The country’s 2-year note was up more than 130 bps (1.30%). The Italian 10-year government bond was up over 40 bps earlier. Italy’s FTSE MIB was off more than 3% and leading wide-reaching losses for European equities. The Stoxx Europe 600 was down 1.3%. U.S. futures show no signs of the pain ebbing, with contracts on all three major indexes 0.7% weaker. Investors leapt into Treasurys, pushing the 2-year yield down 5.2 bps to 2.42% and the 10-year yield down 7.3 bps to 2.86%, both levels were the lowest level since April 27. The 10-year yield had dropped below 2.80% earlier. Against the Euro, the Dollar was the strongest since the middle of July 2017.
While We Were Away: With U.S. markets closed on Monday in honor of Memorial Day, Italian politics continued to be a driving force behind swings in European assets. However, last week’s storyline of the successful formation of a populist parliamentary coalition was turned on its head by an unexpected twist. The coalition fell apart after the country’s President, leery of the group’s pick for finance minister, chose to appoint another as Prime Minister, Carlo Cottarelli, and give him the authority to try and form government. With that task considered a fool’s errand because of the growing support of the previously fringe populist parties, markets assumed new elections were likely to occur in the coming months. Italian assets bore the brunt of investors’ displeasure with yields on the country debt jumping and stocks in the country dropping more than 2%.
ICYMI – May 25, 2018 Weekly Market Recap: A confluence of forces pushed the Treasury curve lower and flatter last week as the 2-year yield fell more than 7 bps to a three-week low and the 10-year yield dropped almost 13 bps to its lowest level in more than a month. Longer yields topped out in Sunday’s overnight session before U.S. traders even turned on their machines. U.S. Treasury Secretary Mnuchin eased market watchers’ concerns about a trade war with China by saying any such plans had been tabled for now. But it was a slow decline for yields the rest of the week. Political uncertainty across the European periphery began to fester. The Fed’s May minutes showed a confidence on inflation but more uncertainty about it sticking that had been reflected in the official Statement. President Trump asked for an investigation into national security risks of auto imports before he called off the June 12 summit with North Korea. And yields slid into the long weekend as oil prices dropped on hints of increased OPEC supply and the uncertainty in Europe escalated. Click here to view the full recap.