US Data in Focus After Encouraging Retail Sales Figures
US futures are flat ahead of the open on Wall Street on Wednesday, as we await a number of data points from the world’s largest economy and Italy closes in on a eurosceptic coalition government.
We got some interesting retail sales figures from the US on Tuesday which helped lift yields and saw a fourth rate hike this year being around 50% priced in. There’s plenty more data to come today which may further lift expectations including housing starts, building permits, capacity utilization and industrial production. The dollar is making gains again early in the session having pared gains late last week and has already set a new high for the year so far, ahead of the figures.
Oil Inventories Could Trigger Some Profit Taking
We’ll also get EIA crude inventories figures today, which comes shortly after OPEC published figures showing inventories in OECD countries had fallen to nine million barrels above the five year average from 340 million at the start of last year. Clearly the production cuts have been working but with the deal rolling on and Iranian sanctions potentially restricting them further, oil prices could rise further before they stabilise.
A drawdown of around three quarters of a million barrels is expected to be reported today although API reported their figures on Tuesday and they indicated that stockpiles actually rose by 4.854 million barrels. A similar reading from EIA today could relieve some of the upward pressure on prices and trigger some near-term profit taking.
Italian Yields Spike and FTSE MIB Slips as Draft Program is Leaked
In Europe, much of the focus has been on Italy where a leaked draft of the joint program of Five Star Movement and League has unsettled investors, leading to 1.5% losses in the FTSE MIB stock index and a spike in Italian yields with the 10-year rising back above 2%. Markets haven’t necessarily been complacent about the prospect of a eurosceptic coalition until now but investors have taken the developments very much in their stride and not got carried away.
Italy 10-Year Yield Daily Chart
Source – Thomson Reuters Eikon 
The draft program though has fuelled investors’ fears about what a coalition of the two parties – both of which have openly opposed membership of the currency union in the past and most likely still do despite it not being a key feature of the election campaign – will mean for the country. The most concerning component was the desire to create economic and judicial procedures that allow member states to leave the monetary union, which makes clear their ultimate intentions.
While both parties have since claimed the draft was an old version and they had since decided against calling into question the single currency, it’s impossible to ignore and even if an exit isn’t pursued in the immediate future, it looks a case of when rather than if they do so, if the coalition is formed. There were other aspects of the draft that will also concern investors, not to mention the joint desire to no longer be constrained by the currency blocks fiscal rules.
It seems euro leaders were too quick to congratulate themselves on a job well done when defeating populists last year and may have a massive job on their hands that makes Brexit look more straight forward. I also wonder how much this could affect the European Union’s approach to Brexit as other leaders will be wary about giving the populists more reason to push for an exit of their own, citing the deal the UK got as an example of what can be achieved.
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