With the risk of new elections in Italy having subsided, markets are looking for clues about the new Italian populist coalition’s policy agenda and priorities. Italian bond spreads recently retreated from stretched levels.
However, we think that the situation will remain fragile as we expect to see clashes between the Italian government and the EU on the economic ruleset over the coming months. Changing the economic EU rulebook is likely to be the focal point of discussion rather than leaving the eurozone. Thus we believe that markets will continue to be very headline-driven. Contrary to the situation in Italy, we expect Spain and Portugal to benefit from rating upgrades by credit rating agencies. The fact that Spain now has a new socialist government will probably not lead us to change our view, as this government should be even more pro-Europe.
Following the recent market turmoil and the weakening growth outlook in the euro area, all eyes will be on global central banks but particularly on the ECB, as its policymakers will meet on 14 June. At this meeting, the ECB will likely signal an important policy change, as headline inflation has spiked despite recent deteriorating economic data.
Recent positive developments in the US-China trade conflict were short-lived. The risk of a renewed escalation over the coming weeks has increased again, leaving the 10-year US Treasury yield in wait-and-see mode below the 3% resistance level. Investors are now focusing on 15 June, when US President Donald Trump plans to announce a specific list of targeted goods for USD 50 billion in Chinese imports. China’s response could affect investors’ risk appetite.