May 21, 2018 / 7:29 AM / 2 years ago

Daily Briefing: Italy set to learn name of new PM

LONDON (Reuters) - The leaders of Italy's anti-establishment 5-Star Movement and far-right League are due meet President Sergio Mattarella today to confirm they are ready to forge a coalition government and to name the person they want to head the new administration.

FILE PHOTO: Anti-establishment 5-Star Movement leader Luigi Di Maio speaks to the media in Rome, May 7, 2018

It seems certain they will nominate someone from outside their two parties but the president does not necessarily have to accept their choice. If he does, the cabinet could be put together rapidly, opening the way for a confidence vote in parliament later in the week.

Italy’s 10-year bond yield is already at its highest since early October this morning as financial markets take fright over an economic programme based on billions of euros of tax cuts and increased welfare spending. Yet the parties can point to an informal weekend ballot held at stands put up across the country suggesting broad support for their platform, at least from the quarter of a million of Italians who participated.

El Pais is reporting that Prime Minister Mariano Rajoy plans to maintain central government control over Catalonia after regional leader Quim Torra nominated imprisoned and exiled politicians to join his cabinet.

Rajoy had promised to return direct rule to the region once a full and legal government was running there. But Torra’s cabinet choices of Jordi Turull and Josep Rull, who are both on remand, and Antoni Comin and Lluis Puig i Gordi, now in Brussels and also wanted by the Spanish police, threaten to prolong the region’s political limbo.

A report by UK parliament's Foreign Affairs Committee released today concludes that Russian money hidden in British assets and laundered through City of London financial institutions has damaged the government's efforts to take a tough stance on Moscow. "The scale of damage that this ‘dirty money’ can do to UK foreign policy interests dwarfs the benefit of Russian transactions in the City," its chairman said.

MARKETS AT 0655 GMT

World stock markets have been lifted by the United States calling ‘time out’ in the trade row with China, but the relentless dollar rise of recent weeks continued unabated and is heaping more pressure on emerging markets such as Turkey.

The Chinese are in a state of quiet glee knowing that Trump’s trade team backed off on sanctions without getting any real and meaningful concessions out of Beijing

Asia’s main bourses were all up smartly after U.S. Treasury Secretary Mnuchin said pending trade barriers against Chinese goods were ‘on hold’ as talks had progressed last week between delegations of the world’s two biggest economies.

The relief helped Shanghai stocks up half a percent, with HK up 0.8 percent, Japan’s Nikkei up 0.3 percent and Seoul’s Kospi up 0.2 percent.  S&P500 futures were up half a percent, with European stock future up by a similar amount.

The dollar powered ahead first thing too, however, with euro/dollar leading the way down to its lowest level of the year at $1.1732 – on course for sixth straight days of losses for the first time in 2018.

Continued nerves about the fiscal stance of Italy’s incoming new coalition government are weighing on the euro as traders debate the impact of stress on Italian debt markets on the European Central Bank’s monetary stance going forward and with the second U.S. interest rate rise of the year due next month.

Italy’s 10-year government bond yield continued to underperform after the biggest jump in its borrowing premium over Germany last week in almost three years. The 10-year BTP yield rose another 4 basis points to 2.26 percent first thing, its highest level since October. The 10-year spread over Spain is at its widest in 6 years.

While the final decision on a compromise prime minister between the two anti-establishment parties is awaited on Monday, banks crunching the coalition’s proposed fiscal measures reckon it could blow the annual fiscal deficit for 2019 out to more than 3 percent from less than one percent previously and in doing so threaten the country’s sovereign debt ratings by lifting debt/GDP projections over time.

Giuseppe Conte, a little-known 54-year-old law professor who had previously been proposed to the president, is seen as frontrunner for the premier position.

The dollar’s rise was broad based, against Japan’s yen and the British pound – with emerging currencies such as Turkey’s lira taking a fresh battering. The lira fell to another record lower, with the dollar/lira exchange rate now up more than 20 percent for the year to date.

FILE PHOTO: A man waves a Catalan separatist flag outside the Generalitat Palace in Barcelona, May 17, 2018

With little sign yet of action to protect the currency from the central bank, who promised as much only last week, the focus is now on June’s elections – after which President Erdogan, the self-proclaimed ‘enemy of interest rates’, has promised to take greater control of monetary policy.

The dollar also clocked up early gains against the South African rand as trades there awaited a central bank policy decision on Thursday and S&P Global sovereign credit rating review on Friday. Elsewhere, 10-year Treasury yield eased back from last week’s highs but remained firmly above 3 percent. Brent crude prices were firmer but still back below $79.

— 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. —

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