September 27, 2018 / 7:30 AM / 2 months ago

Daily Briefing: Crunch time for Italian budget

LONDON (Reuters) - Local Italian media are reporting that this evening’s crunch cabinet meeting on the 2019 budget has been delayed, sending bond yields up.

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

The cabinet was due to meet at 6 p.m. (1600 GMT) to sign off on the new targets for economic growth, the deficit and public debt for 2018-2021.

Under pressure from colleagues to allow more spending, Economy Minister Giovanni Tria has softened an initial insistence the deficit should not exceed 1.6 percent of gross domestic product and is now willing to accept a ratio of around 1.9 percent, sources have said.

This morning there was an official denial of suggestions he is on the brink of resigning, with a spokeswoman saying he continued his work on the targets before the cabinet meeting.

On the eve of his visit to Germany, Turkish President Tayyip Erdogan has called on Berlin to designate as a terrorist group the Gulen movement, which Turkey blames for a 2016 coup attempt. Germany has previously rejected this request, saying it needs more proof linking the network of supporters of the U.S.-based cleric to the failed attempt to overthrow the government.

Relations between Berlin and Ankara may be tense, but there is also a mutual interest in making headway during Erdogan’s trip: Germany and the EU rely on Turkey to stem a potential flow of Syrian war refugees into Europe, while Erdogan needs help with the crisis-ridden Turkish economy.

Jeremy Corbyn rounded off UK Labour's eventful party conference yesterday with what some see as a largely tactical offer to back any Brexit deal Theresa May secures -- as long as it is on terms set down by Labour.

Today, he travels to Brussels to meet Brexit negotiator Michel Barnier and explain how he, if in power, could break the current impasse in the talks. If Barnier is looking to coax a deal out of the May government, he will probably think twice before welcoming any Corbyn overtures too enthusiastically.

MARKETS AT 0655 GMT

World market reaction to the expected U.S. Federal Reserve interest rate rise has been somewhat erratic, even if relatively contained.

As European trading gets underway, 10-year Treasury yields are down for a second day to their lowest in over a week and hovering just above 3 percent – but the dollar is rallying across the board and both Asia stocks and European stock futures have followed the late retreat of Wall Street indices into the red last night.

In sum, the Fed raised interest rates for the third time this year by another quarter point to 2.00-2.25 percent and signalled four more hikes between now and the end of next year, with another in store by the end of 2018.

While that was largely consensus thinking, even if it disappoints some more aggressive forecasts for four rate hikes in 2019, markets appear to latched on to the Fed’s removal of the word “accommodative” when describing its policy in a post-meeting statement.

Additionally, President Donald Trump stepped up his public criticism of the central bank after the decision by tweeting that he was “worried” about the move and “not happy”.

Led by a drop of more than 1 percent in financial stocks, the S&P500 reversed an initial rally and ended about 0.3 percent lower. Asia markets were mostly lower as the dollar picked up steam and data showed another slowing of Chinese corporate profits.

The dollar’s gains were charged further early in Europe on Thursday as euro/dollar was knocked back below $1.17 for the first time in a week by fresh speculation about Italy’s budget, with various local press reports saying today’s critical government budget meeting – scheduled for 1600 GMT - was going to be delayed and others saying Economy Minister Tria planned to resign. The ministry later denied the Tria report.

Turkish President Tayyip Erdogan sits during an interview with Reuters in New York, September 25, 2018

Italian 10-year government bond yields, which have been on edge about the budget for weeks, jumped briefly to their highest in three weeks on the reports before settling down. Italian bank stocks fell at the open.

European Central Bank chief Mario Draghi and Bank of England governor Mark Carney speak later today in Frankfurt. The dollar’s DXY index was up more broadly, however, as the greenback gained against the likes of Japan’s yen and sterling. Emerging-market currencies and stocks were slightly firmer. Brent crude oil prices continued to push to four-year highs.

— 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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