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Russia will buy Italian bonds (Daily analysis 23.10.2018)

23 Oct 2018 13:15|Marcin Lipka

Significant drops on foreign markets with little impact on the currency market. Significant weakening of the Turkish lira. The zloty, similarly to other currencies of our region, reacts calmly to declines in market indexes.

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

  • A lack of macro data may noticeably impact the analyzed currency pairs.

Italians are doing anything to bargain their way out

The beginning of the European session was not looking good. The drops were observed in the Asian equity market, and the contract for S&P 500 lost more than one per cent of its value. This also resulted in the dollar strengthening and the loss of value of the most sensitive emerging market currencies. When markets in the eurozone opened up for good, the downward trend in the EUR/USD reversed despite the weak sentiment on shares. Why?

The main currency pair received support from declining US Treasury bond yields. Before midday, yields on 10-year US bonds fell to 3.14%, while in the morning, the quotations fluctuated close to 3.18%. A slight decrease in expectations regarding future interest rates caused a weakening of the dollar and the EUR/USD to rebound.

Overall, the prospects for the eurozone and the single currency remain weak. This is mainly due to concerns about Italy and the scale of the current slowdown in GDP growth, which seems to be much deeper than expected.

Italy is also in conflict with the European Commission, which may try to block Italy's budget. Although the European Commission did not take such action before, after the crisis (especially at a time when most countries are reducing their deficits), it will try to force the rules of the Stability and Growth Pact. In addition, Italy may also face an excessive deficit procedure from next year. None of this information is positive for Italy, especially since we are currently not dealing with a global crisis and Italy is far from fiscal consolidation.

Rome additionally rushes with ideas that suggest a strategy for grasping at straws. Cited by Bloomberg, "La Stampa" wrote that Deputy Prime Minister of the League Matteo Salvini could ask Prime Minister Giuseppe Conte to discuss with Russian President Vladimir Putin the acquisition of Italian bonds by the Russian Federation. This would take place when the ECB's asset purchase program (including Italian bonds) would be completed.

Once again, Italy is clearly trying to find ways out that will do little to help it. Rome has been working for a long time to terminate or reduce the sanctions imposed on Russia for the annexation of the Crimea, as well as to restore Russia's membership of G8. In fact, these measures will do little to help Italy with its structural problems. Rome's actions are now more like desperation than pragmatism and will damage the valuation of Italian bonds. This is also, of course, a negative signal to the European currency.

Limited impact on zloty

The Polish currency, like the forint or the Czech koruna, calmly accepts the turbulence on the equity market. This is mainly a result of falling yields of the US Treasury bonds (details in the previous paragraphs). The Turkish lira, which sometimes lost as much as 3% to the dollar, is doing much worse. This is a consequence of a growing dispute over the events at the Saudi consulate in Istanbul and problems with maintaining the coalition between the ACP and the nationalist MHP in next year's local elections (Financial Times reports).

In the coming hours, just like in previous days, the zloty should be stable. Only the worsening of the problems in the eurozone and a series of data showing the strength of the US economy can give another positive signal to the dollar. These factors should not occur by the end of today's session, so the zloty is likely to remain within a small fluctuation range.

23 Oct 2018 13:15|Marcin Lipka

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

22 Oct 2018 16:19

Pound and euro depreciate (Afternoon analysis 22.10.2018)

22 Oct 2018 13:22

Moody cuts Italy's rating (Daily analysis 22.10.2018)

19 Oct 2018 16:53

Sentiment improves (Afternoon analysis 19.10.2018)

19 Oct 2018 10:51

Zloty depreciates (Daily analysis 19.10.2018)

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