October 1, 2018 / 7:38 AM / 16 days ago

Daily Briefing: Italy's Tria to meet euro zone peers

LONDON (Reuters) - The standoff between Rome and Brussels is set to get worse, with the European Commission expected to formally reject Italy’s budget plans in November, the Italian daily La Repubblica reports.

FILE PHOTO: Italian Economy Minister Giovanni Tria attends as Prime Minister Giuseppe Conte (unseen) speaks during his first session at the lower house of parliament in Rome, June 6, 2018

It cited sources saying the European Union would have little choice given the plan by the 5-Star Movement and League to push the 2019 deficit up to 2.4 percent of GDP, despite the existing debt overload standing at over 130 percent of output. Brussels still has time to consider what its reaction will be.

Economy Minister Giovanni Tria, who sought in vain to persuade the government to ease off its spending plans, will meet his euro zone peers in Luxembourg for a regular meeting later today; he was out at the weekend arguing that better economic growth would eventually help Italy bring its debt ratio down.

There was a blizzard of words on Brexit over the weekend as the ruling Conservative Party’s conference in Birmingham began.

Not many of them have added much, but some may contribute to the worsening mood post-Salzburg - with Foreign Secretary Jeremy Hunt, for example, likening the EU to a harsh prison from which other inmates may be tempted to escape. The more placatory Finance Minister Philip Hammond has just come out and said he spots a clear willingness in Brussels to do a deal.

If there was a strategic benefit to the EU and NATO in seeing the Greek-Macedonia dispute on its southern flank settled, that goal suffered a setback at the weekend. Turnout in Macedonia’s crucial name-change referendum was so weak that it will not be valid.

No matter that 90 percent of those who voted were in favour of the amendment: a boycott call by opponents plus a poorly handled pro-change campaign meant just 36 percent of voters bothered to turn up. Macedonia's PM vowed to press on to solve the row with Greece but Skopje's ambitions to join the EU and NATO could now be further complicated.

MARKETS AT 0655 GMT

Optimism about a reconstituted NAFTA and what it means for trade compromises more broadly have helped world markets kick off the fourth quarter with a relatively positive spin - even without Chinese markets, which were out for public holidays.

The wife of Britain's Foreign Secretary Jeremy Hunt, Lucia Guo, listens to her husband address the Conservative Party Conference in Birmingham, September 30, 2018

S&P500 stock futures,  Japan’s Nikkei and Canada’s dollar all advanced about 0.5 percent after the United States and Canada on Sunday forged a deal to keep a trilateral trade agreement between the two countries and Mexico alive – and now to be call the United States Mexico Canada Agreement.

Mexico’s peso outperformed and gained 0.8 percent, while the Nikkei’s rise took it to a 27-year high as the yen weakened to its lowest level against the dollar in almost a year. The rest of Asia’s emerging markets did less well, with the South Korean and Indonesian main equity benchmarks in the red on Monday as weekend Chinese business surveys underwhelmed again.

Italy’s contentious budget proposals are also likely to rein in the mood in Europe later as Italian Finance Minister Tria heads to Luxembourg to meet his euro group peers after announcing late Thursday a higher-than-expected 2.4 percent budget deficit target for next year.

While the details of the budget are still unclear and need to be thrashed out in parliament over the coming weeks, the 2.4 percent figure exceeded the 2 percent level Tria has previously indicated was a ceiling if the country’s debt was to be kept sustainable over time.

While the single-year deficit figure will still mean Italy runs a primary surplus in excess of 1 percent, keeps its debt/GDP ratio little changed for the year and mean less than 10 billion euros in net new bond sales, the political ramifications of a row with Brussels have kept markets on edge. Short-dated Italian government bond yields extended Friday’s surge and rose more than 10 basis points first thing on Monday.

Tria on Sunday insisted the debt/GDP ratio would fall by one percentage point a year over the next three years as growth picks up and that debt reduction would be guaranteed by a mechanism that automatically cuts spending if growth falls short. 

He also said the budget was “absolutely not a challenge to Europe”. Details are unclear over how much the increased deficit would involve handouts to poor Italians, demanded by 5 Star leader Di Maio, and how much would be investment spending.  

Euro/dollar was down a touch in early trading, below $1.16 but still off Friday’s lows. European stocks were flat after heavy losses for Italian and euro zone banks on the budget deal on Friday.

The dollar was higher more broadly, with emerging -market currencies and equities lower. U.S. Treasury yields were higher on the trade news and the yield curve steepened a touch. Brent crude oil added to their recent gains and pushed to a four-year high above $83 per barrel.

Sterling was mixed as traders kept an eye on this week’s annual conference of the ruling Conservative Party as it tries to heal rifts over the government’s negotiating stance over Brexit.

— 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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