Calculating the impact's strength (Daily analysis 05.03.2018)

The market tries to evaluate the impact of recent events - elections in Italy, hypothetical restrictions on US imports and the creation of coalitions in Germany. The zloty remains relatively stable - the euro costs near 4.19 PLN, but the risk of zloty weakening may be increased.

The most important macro data (CET - Central European Time). Surveys of macro data are based on information from Bloomberg unless noted otherwise.

• 4:00 p.m.: ISM index from the US service sector (estimates: 59 pts).

Plentitude of events

The assessment of the elections in Italy as the key event of today's European session. Despite the absence of final results, it is almost certain that the populist parties were the most successful (the victory of the Five Star Movement and the good result of the Lega Nord). However, this does not mean that the Five Star Movement will form a government. Most probably, this privilege will be granted to the right-wing coalition of the Berlusconi party (Forza Italia), the aforementioned Lega Nord and Brothers of Italy.

The right-wing coalition will probably not be able to rule on its own as it has won insufficient seats in the Italian Parliament. Therefore, the coalition is needed - it will be necessary to form a Grand Coalition with left-wing groups (including the Democratic Party). Taking into account the ideological differences, forming a government from these parties may take a lot of time and may still be unstable. This could lead to a situation where new elections would have to be held or the coalition between the Five Star Movement with the Northern League would need to be formed.

For the market, a Great Coalition, which is far from major changes in relation with the European Union would be perfect. On the other hand, if it takes too long to form, the market may speculate regarding the alternative scenario, i.e. repeat elections or coalition with the Five Star Movement. Currently, the Great Coalition is more likely, but Sunday's election results have increased the chance for Eurosceptic and populist parties to take over the government. This may be an element of risk for the euro in the following weeks.

In contrast, the SPD members' official agreement to form their government with the CDU/CSU is a positive thing for the eurozone. In Germany, the period of political uncertainty is coming to an end, which may reduce the negative effects of the elections in Italy.

However, the issue of the introduction of import restrictions by the USA is becoming crucial. The issue of tariffs on steel and aluminium is rather symbolic. The Financial Times evaluates that US imports (from all countries) of both metals amounted to only 37 billion USD in 2017. Taking into account the overall import of 2.37 trillion USD, this is an almost invisible value.

However, concerns are arising that foreign trade restrictions may broaden. In one of this weekend's tweets, President Trump suggested the possibility of implementing tariffs on cars from the European Union. According to MIT, when presenting data on foreign trade, the export of cars to the USA from Germany only exceeded 23 billion USD in 2016. Extending protecting measures by the United States could increase the possibility of trade wars (retaliatory actions from the Union or China against US goods), which could have a negative impact on general market sentiment.

Zloty is relatively stable

Currently, this weekend's events have had a limited impact on the zloty. Perhaps it is caused by the fact that the impact of negative news on appetite on the risk from Italy and the USA was decreased by the SPD's agreement to establish a coalition in Germany.

Generally, sentiment may be unstable in the following hours. The discussion on the Italian elections is likely to be fierce and the issue of restrictions on foreign trade will also attract investors' attention. Moreover, there are more threats to the zloty than positive information, therefore, the chances of zloty's weakening are slightly greater than the chances of maintaining close to current levels or appreciation. If the sentiment in the US session worsens, the EUR/PLN pair may breach 4.20 boundary and enter this year's records.