Watch the Fed as Italy’s crisis puts it in the hot seat

A respite from southern Europe may be coming this morning, even as trade-war winds start blowing around again.

La dolce vita may be returning to markets, after the Italian job done on them yesterday, with even the euro getting some respite. But everyone will still no doubt be on the lookout for more potentially explosive headlines from the boot-shaped nation.

“I think the Italy thing may be a one or two-day event, and will likely have a more significant impact on yields and the dollar than equity prices. But it will mark a rotation out of the higher interest-rate trade into the sectors that would benefit from lower rates,” says Kramer on his blog.

All that Italian noise means the likelihood of the Federal Reserve hiking three times in 2018 “just went out the window,” he writes, given 10-year Treasury yields fell 2.79% yesterday (in their biggest drop since Brexit). Plus, the Italy kerfuffle may also put the European Central Bank off winding down QE.

Thanks to a strong U.S. economy and rising inflation, some see at least two more Fed hikes this year. But the CME Group’s FedWatch tool shows the chances of a June hike have slipped to 81.3% as of Wednesday, from 90% a week ago. Grazie mille.

And four hikes this year? Fuggedaboutit, going by this Daily Shot chart:

The Daily Shot

“Off the top of my head, it is bad for the banks, materials, energy, and multinationals, while good for staples, utilities, and risk-on sectors, tech, and biotech,” Kramer says.

The market

Dow  S&P 500  and Nasdaq-100  futures are firming up nicely, a bounce some may have expected after the Dow  , S&P  and Nasdaq  got crushed, Italian-style, yesterday.

The dollar is dropping, as the euro  gets a foothold, though it may not be out of the woods. Gold  is flat, but oil is   perking up.

A global selloff extended to Asia where China stocks were hardest hit. Europe  is hardly off to the races, but Italian stocks are making an effort.

See more in Market Snapshot

The buzz

U.S.-China trade-war worriers may be ready to reboot. A surprise move by the White House to go ahead with tariffs on some China goods could put the kibosh on this weekend’s trade talks. Beijing’s response? “We do not want to fight, but we are also not afraid to fight,” according to reports.

Dick’s Sporting Goods  is up after an earnings beat, and DSW  will report ahead of the open. Salesforce.com  could be active after results and its annual outlook beat Wall Street forecasts. HP  posted a revenue beat late Tuesday.

In the buildup to Friday’s jobs report, we’ll get ADP employment data for May and revised first-quarter GDP today, along with the Fed’s Beige Book.

The chart

While the ramifications of an Italian crisis and worst-case collapse of the eurozone would be a huge problem for pretty much everyone, it’s worth pointing out that the U.S. has far less to lose when it comes to trade, as this chart of the day from Capital Economics shows.

Its shows the tiny amount of exports the U.S. sends to Italy — less than 0.5% of GDP in 2017.

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