LONDON (Reuters) - Italy's government is on the brink of collapse after the leader of the ruling League party, Matteo Salvini, called the governing coalition with 5-Star unworkable and said the only way forward was to hold fresh elections.
This follows months of bickering, but the straw that broke the camel’s back was ostensibly on Wednesday when 5-Star and the League voted against each other in parliament over the future of a high-speed train link with France.
5-Star has more parliamentary seats than the League, but Salvini’s party now has twice as much voter support, polls show, making it well placed to benefit from a snap election.
Still, Salvini's gambit is not without risks: pushing the country into election mode in August, when Italians are on holiday and parliament closed, could hit his popularity. Prime Minister Giuseppe Conte, who belongs to neither party, has asked Salvini to explain his call for early elections.
British finance minister Sajid Javid issued a statement late last night saying he would delay a long-planned review of public spending due this year to allow officials to focus on preparing for Brexit on Oct. 31.
That will allow the government to fund the spending promises made by PM Boris Johnson while he was in campaigning mode: In addition to aiming for tax cuts, he has already promised an extra 20,000 police officers, more health spending, higher school funding and money for poorer towns.
With speculation growing that Johnson is preparing for a snap election in the days after Brexit, opposition Labour accused him of splashing the cash in a blatant attempt to buy votes.
MARKETS AT 0655 GMT
The chances of early elections in Italy and Britain are rising fast, and the imminent collapse of Italy’s ruling coalition prompted a reversal of sliding Italian government debt yields on Friday.
Reports UK PM Boris Johnson is planning for an election in the days after an Oct 31 Brexit sent the pound to two-year lows against the euro late Thursday.
The 10-year Italian government bond yield jumped 20 basis points to 1.739% — its highest in almost a month — and the gap over equivalent German benchmark yields widened out to 230 bps, its widest since July 2 – after Deputy PM Matteo Salvini called for early elections after months of bickering between his right-wing League and the populist 5-Star movement that’s been its coalition partner in for the past year.
Snap elections have been likely for months, but markets were jarred by the speed with which Salvini – who’s publicly insisted the government would last its full five years – has opted to push for a new poll.
Much now rests on Italian President Sergio Mattarella, who has to decide whether to appoint a technocrat government to rule through the summer and draft the 2020 budget in September, or go to the electorate while many Italians are on holiday.
The fate of the 2020 budget and shape of any new government will be key to the smouldering dispute between Rome and Brussels over attempts at an expansionary budget that breaks European Union budget rules. Salvini’s League are well ahead of 5-Star in the polls.
Also unnerving for Italian bond markets is a review of Italy sovereign credit rating by Fitch later on Friday. Italian stocks and bank stocks in particular are expected to fall at the open.
In the UK, the pound steadied on Friday after hitting those lows against the euro. The declines came after the Financial Times reported that Johnson was also planning a snap election shortly after seeing through a no-deal Brexit on Oct. 31 - what many see as the worst of both worlds for the battered pound.
UK finance minister Sajid Javid, meantime, postponed a review of public spending to allow officials to focus on preparing for Brexit. And UK GDP numbers for June due out later are expected to show the economy slowed to a standstill around midyear following an artificial boost to the economy in early 2019 from pre-Brexit stockpiling.
The Italian election surprise saw German bund yields sink again back toward record lows of -0.609% set on Wednesday after a brief fillip late Thursday on reports Germany’s government was considering a fiscal boost by issuing new debt for climate protection.
Underneath the headlines of the biggest S&P 500 gain in two months, however, was a 9% percent drop in Kraft Heinz after it pulled its full-year forecast and announced another $1 billion writedown of its business.
Asian markets went in different directions. Japan’s Nikkei and Seoul’s Kospi pushed higher; Shanghai and Hong Kong were in the red as inflation numbers from Beijing saw producer prices fall for the first time in three years and rekindled deflation worries.
A Bloomberg report overnight that Washington will hold off on a decision about licensing U.S. companies to restart business with Huawei also hit tech and trade-sensitive sectors. The yuan’s new target midpoint was fixed at a new low above 7 per dollar, with the offshore yuan holding steady about 7.07.
The dollar was steady more broadly, with euro/dollar up to just shy of $1.12. European stocks opened about 0.5% lower, weighed down by Italian stocks and banks.
In European corporate news, Novo Nordisk was seen rising 2% to 3% as the Danish pharma company lifted its 2019 sales outlook after an estimate-beating second-quarter results. UK pharma company Hikma was seen up 1% after it raised its sales outlook for generic drug business. AstraZeneca was seen rising 1% after its study showed that its Tagrisso helps lung cancer patients live longer.
G4S shares could get a lift after its board approved plans to separate its cash solutions business. The British security contractor says it got unsolicited "expressions of interest" from third parties.
WPP's better-than-expected organic sales performance in the second quarter was seen driving its shares 2% to 3% higher. German IT systems provider Bechtle beat second-quarter expectations; its shares rose 5% pre-market. Car-parts maker Hella reported fourth-quarter results in-line with pre-released numbers.
— 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 —