• Asian equities trade lower on Tuesday as Italy-related political concerns intensify
  • Japanese yen gains traction after the labour market release for April
  • Fed’s Bullard says it should be cautious with further rate increases
  • Brexiteers warn the UK could keep paying into the EU until 2027

Italian and Spanish politics dominated financial markets yesterday, and it is unlikely that both topics would disappear any time soon. On Monday Italian President Mattarello asked former IMF director Carlo Cottarelli to forge a caretaker government after the president vetoed a joint candidate Savona put forward by 5SM/League over the weekend. Since then, Cottarelli has decided to be a ’one-man government’ as he is likely to be both finance minister and prime minister in the new government. The new Italian FM and PM is expected to present a programme to the parliament including a budget with a plan to take the country into new elections at the beginning of the next year. However, his programme has just tiny odds to be passed in the parliament, and if he fails to do so, it would result in yet quicker elections possibly in September. Asian equity investors have responded nervously to never-ending European political concerns, and in effect the Chinese Hang Seng (CHNComp on xStation5) is sinking 1%. Other indices are trading not far behind it, and the NIKKEI225 (JAP225) is dropping 0.8%, mostly on the JPY rise, whereas the Shanghai Composite is giving back 0.5%. Do notice that a risk-off mode is also noticed in the US bond market as the yield on 10Y bonds has moved lower over three basis points when the country’s debt market reopened after a holiday.

link do file download linkThe China’s major index is losing momentum in early trading, but it has yet to breach its crucial demand zone placed in the vicinity of 11800 points. Therefore, once the political dust settles at least to some extent, this market could be worth looking at considering a possible long exposure to Asian equities. Source: xStation5

As we reported earlier this post the Japanese currency is by fat the strongest one within the G10 basket being up roughly 0.5% against the greenback. To be honest, this move has probably little to do with the labour market data we were offered overnight as politics seems to play a major role at this stage. Anyway, let’s sum up that the unemployment rate stabilized at 2.5% in April while the job to applicant ratio did not move as well holding onto 1.59, the highest level for more than 40 years. Writing about major currencies it’s worth mentioning a Fed’s Bullard speech popping a while ago. He said that the Federal Reserve should be cautious with further rate increases as inflation expectations are still a bit low, and other central banks such as ECB or BoJ remain on hold. He also stressed importance of a yield curve shape reminding us it turned out to be a perfect tool to predict recessions in the past.

link do file download linkThe USDJPY slipped overnight as risks related to European politics spooked investors. The pair has already reached a decent support which could give some hope for buyers to see a bounce in the near-term. Source: xStation5

The last topic being worth underlining concerns Brexit, another never-ending story in Europe. Namely, Brexiteers warned last night that the UK could end up paying into EU funds even after leaving the block. They said, being cited by The Times, that the UK will help to determine the EU’s 1 trillion GBP budget up to 2027 after European countries defied Brussels and asked UK officials to take part in negotiations. The pound did not react to this story at all as investors seem to be already bored with it.

link do file download linkThe GBPUSD is constantly struggling with a remarkably important support line at around 1.33. The pair trod water yesterday as British traders were on a holiday. Source: xStation5