Brussels-Rome pulse complicates the scenario for investors

ItalyItaly's VP Matteo Salvini

Link Securities | We highlight the negative impact that the new conflict between the European Commission (EC) and the populist government of Italy is having on the European securities markets and on the euro. Rome has not taken the necessary measures to contain the public deficit, which it will lead to a further increase in Italian public debt, whose weight could surpass 135% of GDP in two years.

The position of the most powerful politician in Italy at the moment, the vice president of the Government and leader of the League, Matteo Salvini, does not invite to be optimistic. His populist proclamations have been in crescendo in the last days, after his comfortable victory in the past European elections. This issue seems to be getting even stronger if, finally, the European Commission (EC) opts, as everything seems to be happening, to sanction Italy.

Therefore, the scenario faced by investors can not be more complex in the short term, so they are clearly opting to take refuge in defensive assets. The recent bond rally, and the consequent fall in their yields to multi-year minimums, demonstrates the lack of investor confidence in the immediate future of the main Western economies.

We will see to what extent this reaction is disproportionate or not in the coming weeks, when macro data will be published to confirm or not that a new deceleration of economic growth in the major developed economies.

Note that the meetings held at the beginning of June by the main central banks acquire great relevance at this time, first because they will serve to know their opinion about the state of these economies and their expectations about the future of the same and, secondly, because they will give proof of their intentions, that is, whether or not they are willing to intervene if necessary. Until then, investors will continue to act with great caution and volatility in the stock markets will be a constant.

Only an approximation between the US and China that opens the door to a return to the negotiating table could reassure the investors’ mood.