### POV: EUROPE REMAINS EXPOSED TO ITALIAN.....>

EURO: ### POV: EUROPE REMAINS EXPOSED TO ITALIAN RISKS

-The divergence between EU and US stocks is at a historically high level with

the Stoxx600 dropping 5%, while the S&P500 rose near 7% since May (before

yesterday's sell-off). European equity underperformance tracked the widening of

the IT-GE yield spread, generated by Italian budget issues. This effect is

compounded when looking at Italy's FTSE-MIB, which underperformed both the

Stoxx600 and the Eurostoxx50 over the same period.

-In late May, IT 10Y yields suffered the biggest one-day rise since 1992 and the

IT-GE yield spread recently broke a 5-yr high at 300bps, weighing on the EUR.

-Correlation analysis shows that this relationship is yet to end. The

correlation between BTPs and EUR/USD has strengthened, suggesting further rises

in BTP yields will keep the EUR under pressure. This may also have read-through

effects for Italian (and broader European) equity markets, considering the close

relationship between the EUR and equity performance over the past three months.

-Markets may be particularly sensitive on Monday as the Italian cabinet are due

to meet and discuss 2019 budget law.