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Italy Headlines Shake EU, Pre-Markets

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Tuesday, May 29, 2018

Headlines out of Italy this morning may come as a surprise to many U.S.-centric investors, but for those who have paid attention this may have looked doomed from the start: a coalition government between two anti-establishment parties — the progressive 5 Star and the far-right The League — appears to have hit a major bump in the road that threatens to send the wheels flying off. The mandate to form a new government has been refused, and fresh elections now look imminent.

The March 4 elections resulted in a hung parliament, when Italians voted to shake things up by removing standard liberal and conservative parties in favor of 5 Star — a populist movement started by an Italian comedian — and The League, an anti-EU group led by right-wing firebrand Matteo Salvini. Among first orders of business for the economically challenged country was to secure a new loan from the EU and somehow pull together the disparate ideals of each “outre-party.” This appears to have resulted in an immediate failure to launch.

So back to the drawing board for Italy, as designated Prime Minister Giuseppe Conte has bowed out of further attempts to forge a compromise government. Italy’s current President Sergio Mattarella, a staunch pro-EU figure, is reportedly turning to the IMF to supply the country with a new compromise figurehead. But the push-pull in the country with regard to remaining within the Union is developing into real-time tension in the country and Europe in general.

Market futures here at home may be indicating some concern regarding this issue. After last week’s modest uptick, with very little by way of economic indicators driving the bus, U.S. indexes are trading in the red ahead of Tuesday’s opening bell.

And though we start the new week slowly, with a Monday holiday and only a smattering of econ data hitting the tape today, we see things really picking up as the week progresses: a second read on Q1 GDP (2.3% was the first headline number), private-sector payroll figures from ADP ADP and Friday’s non-farm payroll report and fresh unemployment rate. These results will feed into the June narrative about a fresh interest rate hike from the Federal Reserve.

But the concerns about Italy are not so easily shrugged off, especially considering its affect on the EU in general. When Greece looked into the economic abyss a few years ago, it unmistakably shook markets here at home. And now, with perilous situations emerging elsewhere around the globe, from Turkey to Venezuela, it’s clearly not the time to turn a blind eye to the world’s problems, especially with regard to their potential to roil the markets.

Mark Vickery
Senior Editor

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