LONDON (Reuters) - The European Central Bank has a blunt message for Italy’s leaders: Don’t expect us to shield you or your banks from financial market displeasure at your spending plans.
Sources at the ECB point to European Union rules that state that it cannot help a country unless it has already agreed on an EU bailout in exchange for belt-tightening and painful economic reforms - an option Rome has firmly rejected.
This message is in line with the one coming from Brussels sources, which previously indicated to Reuters that it does not consider Italy “too big to save” - in other words, the EU believes the euro zone now has the structures in place both to limit any contagion from Italy and then to clean up the mess afterwards. As one source familiar with the ECB’s thinking said: “It’s a test-case to show Europe and its mechanisms work.”
The general noise coming out of British PM Theresa May's cabinet meeting last night suggests that she gave ministers the distinct impression a Brexit deal was imminent. That has in turned prompted speculation that those ministers on the hard-Brexit end of the spectrum are equally close to quitting, given their fears that May's deal will bind the UK into perennial vassalage; DUP officials are meanwhile talking darkly of betrayal.
In other words, it’s all business as usual ahead of next week’s summit and probably only a foretaste of the grandstanding to come over the next few weeks. Envoys from the other 27 EU member states meet in Luxembourg to discuss the state of play today.
The big election over the weekend is in Bavaria, where the incumbent conservative CSU party faces a major challenge from the upstart AfD far-right movement. Polls show the CSU will win at most 35 percent on Sunday, losing the absolute majority with which it has controlled its southeastern heartland for most of the post-war period.
One possible outcome is that the socially conservative party is forced into an alliance with the left-wing Greens - odd bedfellows indeed. The election also has consequences for national politics: the CSU are Merkel’s longstanding allies in Berlin, so anything that weakens them in turn could make her coalition even more fragile.
MARKETS AT 0655 GMT
Is this it for the stock market bulls? Maybe not. After Wall Street's SP500 fell another 2 percent last night -- weaker-than- expected inflation numbers failed to staunch the bleeding -- futures are pointing to a strong rebound today.
Asia’s MSCI ex-Japan index has bounced 2 percent and Europe is set for a firmer opening, too. But two big loss-making sessions have left the S&P500 looking at its third straight week of losses –- the longest weekly stretch in the red since June 2016.
It’s also left investors scratching their heads for the reasons – is it machine-based trading? Trade tensions? The Fed? One theory has been that equity markets, especially tech shares, have been carried higher by momentum, above where they should reasonably be -- the question is whether the same will apply on the way down. But maybe that downturn has been deferred for the time being.
U.S. banks today kick off the third-quarter earnings season, a crucial test for markets. Expectations are the quarter as a whole will deliver 20 percent-plus earnings growth, which should be a source of encouragement for equity investors.
But fears may centre around China, where Shanghai stocks, despite today’s 1 percent bounce, are set for almost a 10 percent fall this week. And the yuan is biting the dust again today, down a quarter percent to the dollar to a near four-year low on nervousness that a U.S. Treasury Department report due next week will label Beijing a currency manipulator.
What’s more, latest Chinese trade figures may stoke President Donald Trump’s ire. There’s no sign so far of trade wars denting Chinese exports -- its trade surplus with the United States hit a record high in September. However, the trade data may have helped Shanghai stocks rebound 1 percent.
On the currency front, the dollar touched a fresh two-week low against a currency basket, reeling from the equity selloff, the weaker inflation data and Trump’s fresh criticism of the Fed, whose rate rise he called "ridiculous". But the dollar’s weakness has provided some relief to emerging currencies, with an index up almost half a percent and others, such as the Indian rupee, rebounding from record lows.
The other emerging-market weak link -- the Turkish lira -- now seems firmly above 6 per dollar, approaching two-month highs on hopes that a trial of a U.S. evangelical pastor will result in his release. Sterling and euro are motionless this morning, though the former is near three-week highs, coiled like a spring for any sign of more Brexit news.
European shares were set to benefit from Asia’s rebound, with futures extending gains up 0.7 to 1.2 percent across the main euro zone and UK benchmarks. If the bounce is sustained, the euro zone STOXX could make up some of this week’s heavy losses, which have left it on track for its worst week since the February selloff.
Positive comments from the IMF could help confirm Europe’s rebound: the head of the IMF’s European unit said the direct impact of potential U.S. car tariffs on Europe would be relatively limited, though they could still affect investor sentiment.
Big European brewers ABInBev and Carlsberg could move after a source-based Reuters report that India’s antitrust watchdog raided their offices in at least two Indian cities as part of an investigation of alleged price-fixing.
In the UK, results from more asset managers are likely to move shares after Jupiter and Hargreaves Lansdown disappointed on Thursday. Both Man Group’s and Ashmore’s funds under management rose thanks to market gains and net inflows.
Emerging-market stocks rose almost 2 percent, snapping a six-day losing streak that culminated in the biggest daily fall since the Brexit vote market turmoil in June 2016.
Asian shares rebounded; Hong Kong, Taiwan and India jumped 2 percent and China mainland shares gained 1 to 1.5 percent. However, the latter are on track for their worst week since the emerging= market rout in early February, while the broader MSCI’s EM index is on track for a 2.8 percent fall over the week – its third straight week in the red.
Emerging-market currencies also chalked up healthy gains. Turkey’s lira rose nearly 1 percent against the dollar, extending a 2.5 percent gain the previous day, on expectations that the standoff between Washington and Ankara over the U.S. evangelical pastor Andrew Brunson could be resolved soon with another court hearing in the case set for Friday. The currency looks on track for a gain of around 4 percent for the week, its best such advance since mid-August.
South Africa’s rand sailed 0.8 percent higher ahead of a Moody’s ratings decision, though markets widely expect the ratings agency to keep as is and await the mid-term budget to be delivered by new Finance Minister Tito Mboweni on October 26.
— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Sujata Rao. The views expressed are their own —