US withdraws from Iran nuclear deal
US president Donald Trump announced earlier this month that he was pulling the US out of the 2015 nuclear deal with Iran and is planning to reintroduce tough economic sanctions until Iran agrees to US demands to further limit its nuclear programme. From the perspective of the financial markets, the crux of this decision is its impact on oil prices. Iran is one of the world's leading oil producers and exporters, so naturally this has caused waves in the market. We should point out, however, that the US does not import oil from Iran, so it cannot hit Irans oil sector directly. Moreover, the countries (EU, India, Japan and China) that do buy Iranian oil have so far not endorsed the US decision - and the EU has even argued against it.
Nevertheless, the oil price is hovering around its highest level since the end of 2014 - close to USD80/bbl. Naturally, one of the reasons for the high oil price is the above uncertainty surrounding Iran. In addition, the global economy remains buoyant, which is supportive of oil demand. Finally, we should also keep an eye on Venezuela. Oil production here has been falling due to the country's worsening debt situation. Further falls in production could send prices even higher. OPEC is scheduled to meet on 22 June, and the oil market will be closely following the cartels reaction to the higher oil price.
Political uncertainty in Italy
Italy is currently hit by political uncertainty after the Italian president rejected to approve the candidate for new finance minister in the new government. The parties Lega and Five Star had managed to agree on a new coalition after months of negotiations. Investors have started to discount Italian bonds and now it seems most likely that we will have a new election in September. Beyond a euro sceptic finance minster the two parties have proposed an increase in public expenditure of 6-7% of GDP, which would lead to a wider public deficit of 5-6% of GDP and thus above the EU's threshold of 3% of GDP. The credit rating agency Moody's has put Italy on 'negative outlook'.
EUR/USD has fallen
USD has appreciated over the past month, with EUR/USD reaching 1.15 in May. There are several reasons for the fall in EUR/USD, but first and foremost amongst them is rising US yields on the back of a growing government debt and rising political uncertainty in Italy. In addition, the US economy has been performing better of late, while another factor could be recent progress on US foreign and trade policy. The US-North Korea summit to discuss North Korea's nuclear programme appears to be on again, while China and the US have edged closer to a trade deal. China has recently aired the possibility of committing to buying more US goods.
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