LONDON (Reuters) - Preliminary results in Poland's weekend local elections are coming through today, but already it looks like a less-than- resounding victory for the ruling Law and Justice (PiS) party.
Notably they failed to carry off the main prize of Warsaw and lost in other urban areas, where scepticism about the PiS brand of socially conservative, autocratic rule is highest.
It is too early to make predictions about what this means for next year’s parliamentary elections, but a similar result could allow opposition parties to band together and defeat PiS.
Whether the presence on Saturday of some 700,000 people on the streets of London calling for a fresh vote on Brexit will influence events remains to be seen, but in the meantime its business as usual on the impasse story. UK Brexit negotiator Dominic Raab's suggestion that he could accept an extension of the post-Brexit transition period, but only if the Irish backstop was dropped.
That was been promptly shot down by Dublin; it was always unlikely that the EU side would back down from a key part of its negotiating stance so cheaply.
Today PM Theresa May will attempt to quell some of the mounting domestic criticism of her handling of the talks by telling parliament that the deal is 95 percent done.
Perhaps with a view to pre-empting the market impact of negative news, Italian sources said at the weekend they expect the European Commission to reject Rome's 2019 budget as early as Tuesday.
In the meantime, Italian bonds have perked up on the back of 5-Star leader Luigi di Maio's assurance that Italy wants to remain in the euro and the relief that Moody's at least kept its outlook on Italian debt stable despite an expected downgrade of its sovereign rating to Baa3 on Friday.
Promises of tax cuts and coordinated official statements of stock market support saw Chinese shares stage their biggest one-day surge in almost three years, while 10-year Italian borrowing costs recorded their biggest one-day plunge since June after Moody’s credit firm on Friday downgraded Italy’s sovereign rating to the final rung of investment grade but revised its outlook to stable from negative.
The two influences brightened the increasingly gloomy mood on world markets rattled by the Sino-U.S. trade war, rising U.S. interest rates, Italy’s standoff and messy Brexit negotiations.
With the current corporate earnings season also chiming in as a positive so far, stock markets around the world have bounced back modestly after last week’s steep losses.
While the Shanghai-Shenzhen CSI300 benchmark climbed more than 4 percent – its biggest daily jump since November 2015 – and Hong Kong’s Hang Seng rose more than 2 percent, gains in Tokyo and Seoul were a more restrained 0.3 percent. U.S. and European stock futures were up about 0.4 percent.
MSCI’s all-country world stock market index was up 0.2 percent after losses of almost 4 percent last week, its worst week since March.
In Italy, Moody’s decision to move the sovereign ratings to stable eased outside fears of another imminent cut of the rating to “junk” status and stoked hopes S&P would do likewise when it reviews the credit this Friday coming.
The sharp 25-basis-point drop in 10-year Italian yields and some 40-basis-point retreat in two-year yields also reflects the degree of speculative positioning in that market at the end of last week.
Moody’s said its decision to downgrade Italy was because the new government’s controversial budget was only likely to stabilise the country’s debt-to-GDP ratio rather than set it on a downward path as promised with European Union monitors, leaving the country’s budget math and debt sustainability more open to a surprise domestic or global growth shock.
Although the European Commission is expected to ask Rome to re-draft the budget, it’s not clear yet whether it will enact its “excessive deficit procedure” that could lead to penalties on Rome.
So far, the government insists it can convince Brussels of the merits of its plans.
Deputy PM Di Maio said on Monday the government was ready to discuss the plans, was mindful of recent bond market moves and had no intention of leaving the euro.
With one eye on this week’s European Central Bank meeting, the bond market rally in Italy helped the euro/dollar exchange rate higher first thing Monday.
The dollar was a touch easier more broadly, with the yen underperforming as world stock markets rallied.
Sterling was steady after failure to reach a Brexit agreement at last week EU summit has shifted attention back onto UK PM Theresa May’s position within her own party back at home.
An estimated two-thirds of a million people took to the streets of London at the weekend demanding another referendum on Brexit.
In corporate news, trade-hit automakers will be in focus after Fiat Chrysler agreed to sell its Magneti Marelli unit for 6.2 billion euros, while German carmakers, hit last week by Daimler's profit warning, could find support after Chancellor Angela Merkel promised legislative changes to ward off the threat of air pollution leading to driving bans.
Italian banks could be supported as bond yields dropped across the curve after the Moody’s move.
In earnings, eyes were on Ryanair after it posted a 7 percent fall in summer profits and warned that European short-haul airfares would remain soft this winter.
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.
Editing by Larry King