LONDON (Reuters) - Anyone assuming market discipline would dissuade Italian politicians from a big-spending 2019 budget was wrong.
Last night's deal to fulfill campaign promises of tax cuts and higher welfare spending will mean a deficit of 2.4 percent of GDP, at the top end of expectations and three times that targeted by the former government.
That marks a victory for party chiefs of 5-Star and League over economy minister Giovanni Tria, an unaffiliated technocrat, and throws down the gauntlet both to holders of Italian debt and to Brussels.
Bond yields have pushed up so far this morning but the euro is shrugging the news off for now. One outstanding question now is whether the European Commission can approve such a budget, given Italy’s existing debt mountain of more than 130 percent of GDP.
Some had been suggesting that Brussels could just about have swallowed a deficit of anything up to two percent; this could be several decimal points too far.
Britain's Theresa May heads to the Conservative Party conference starting this weekend as a poll of polls shows Britons narrowly back remaining in the EU by 52-48.
As the pollster NatCen cautions, that represents little actual change in public opinion since the 2016 vote: and a Remain victory in any future second referendum would depend on Remain-minded voters who did not vote last time casting their ballot this time.
All that may be jumping the gun a bit: the party conference will play out largely over whether May's so-called Chequers compromise on future ties with the EU can survive or not. Former foreign secretary and potential leadership challenger Boris Johnson is renewing his calls for it to be ditched.
One of the most important votes in the Balkans in recent years takes place on Sunday when voters in Macedonia decide whether to adopt the country's new name worked out in a June deal with neighbouring Greece.
The name dispute has for decades hobbled Skopje’s chances of joining the EU and NATO, with Athens long arguing that any name choice involving “Macedonia” implied territorial claims to its northern province of the same name. Greek PM Alexis Tsipras’ decision to relent has resulted in a proposal of “Republic of North Macedonia”.
While that has angered nationalists on both sides of the border, most who expect to vote on Sunday will back the name. The question is whether a boycott campaign by its critics will mean that turnout is not sufficient for it to pass.
MARKETS AT 0655 GMT
Well, well, well — what an end to a quarter. We’ll come to the latest Italian fireworks in a minute but in other markets, amid all the bad tempered rhetoric between Trump and so many others – Beijing, Tehran, Ankara spring to mind – the emerging markets selloffs, central bank scares and the fresh flare-up of Italian political risks, there are some surprising outcomes.
World stocks are up around 4 percent after two weak quarters. Brent is set for its fifth consecutive quarter of gains, the longest since 2007. The dollar is ending the quarter less than half a percent up – has its rally fizzled?
What’s unchanged is that U.S. stocks are holding on to their top performing position – they are ending Q3 with around 7 percent gains, the biggest quarterly rise since 2013. The Turkish lira has lost 14 percent this quarter but a recent rebound has set it on track for at least earning the best-performer crown for September.
But quarter-end aside, there are interesting developments in Italy where it turns out the budget deficit will be 2.4 percent of GDP for the next three years, triple the gap the previous government had agreed with Brussels.
That has again put in play the possibility of a credit rating downgrade, at least by Fitch and Moody’s. Italian bond yields have jumped more than 20 basis points, stocks in Italy are likely to tank, led by bank stocks.
The euro suffered most of its pain overnight, slumping 0.8 percent, though yesterday’s post-Fed dollar strength had something to do with it. We’ll watch CDS today and the potential impact for the rest of the southern Europe.
World stocks are flat, though New York rose, after the Fed expressed confidence on the economy and data confirming Q2 growth at the fastest in almost four years. In Asia, Japanese stocks rose to 27-year highs as the yen weakened against the dollar.
On currency markets, the dollar, despite some doubts about the sustainability of its rally, is at nine-month highs to the yen, while against a currency basket it is at a two-week high.
The Italian developments mean the euro is unlikely to have much joy today. It’s also down 0.2 percent to the Swiss franc at a one month low. It could be moved by inflation numbers due today – remember core inflation disappointed last month but there are hopes of a pick-up after higher-than-expected German price growth today.
German business morale is holding steady, according to the IFO monthly survey even if companies have scaled back expectations due to trade war fears. Sterling looks quiet, as Prime Minister Theresa May’s ruling Conservatives head for Birmingham for what looks likely to be a punchy conference. The yuan is set for a second straight lossmaking quarter vs the dollar.
European shares are opening a quarter percent lower, with Italian stocks down 1.7 percent, led by banks that have lost as much as 5-6 percent on open due to their exposure to sovereign debt.
Some euro zone benchmarks in Spain and Portugal are down 0.7 percent. The STOXX 600 was likely to end the week below the one-month high hit in the previous session but may still post a small weekly gain, its third in a row.
European airlines, which have come under pressure due to the recent surge in crude oil prices, will be in focus with easyJet saying its annual profit would come in at the upper end of a guided range, and Ryanair facing another staff strike that will disrupt the plans of more than 40,000 travellers.
In other stock movers: BASF's Wintershall and DEA to create independent oil and gas business; M&C Hotels CEO to step down after just five months; Insurer RSA says poor UK underwriting results hit Q3; Britain's United Utilities sees higher first-half profit, revenue; Swiss group GAM revamps management after share skid; Congo state miner warns Randgold on transfer of Kibali mine to Barrick; Rolls-Royce facing fresh issues on Trent 1000 engine; Novartis strikes deal with Chinese firm to make Kymriah
On the emerging markets front, Turkey’s lira struggles higher against a solid dollar, clinging onto the top spot of best performing currencies this month, with a near-10 percent gain for September following seven straight months of losses.
The gains come as President Tayyip Erdogan arrives in Berlin for a three-day visit on a mission to patch up relations with Berlin and amid hopes that Ankara will be able to resolve its dispute over a U.S. pastor with Washington. South Africa’s rand gains 0.2 percent ahead of budget balance data while elsewhere, most emerging currencies are treading water.
The broader emerging currency index is on track to eke out a monthly gain after five straight monthly losses. China’s yuan is the exception – on track for a sixth straight decline in September.
Emerging stocks snap a two day winning streak, weakening 0.2 percent as the broader index gets pulled lower by falls in heavyweight South Korea where Samsung shares tumble more than 2 percent as its chairman will continue in his role despite an indictment for allegedly sabotaging labour union activities.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —