December 20, 2018 / 8:33 AM / 6 months ago

Daily Briefing: Italy and EU: agreeing to disagree - for now

LONDON (Reuters) - In the end, neither Rome nor Brussels was in the mood for a fight.

Italian Prime Minister Giuseppe Conte meets with European Commission President Jean-Claude Juncker in Brussels, Belgium November 24, 2018. REUTERS/Piroschka van de Wouw

Yesterday's compromise on Italy's 2019 budget eases the financial market pressure on Italian bonds and allows Brussels to focus on dealing with Brexit and preparing for European Parliament elections next year, where eurosceptic populists are hopeful of gains.

One thing the negotiations have thrown into relief is the rising stature of Prime Minister Giuseppe Conte, the political novice initially brought in to be the front man while the real power lay with the coalition party leaders.

Both 5 Star’s Luigi Di Maio and League’s Matteo Salvini praised his handling of the stand-off with the European Commission; now Conte is quoted as saying he has no intention of stepping down and promising that Italy will remain a committed EU member.

Wednesday's chaotic UK parliament session saw a row over whether the opposition leader called Theresa May a "stupid woman" squeeze out serious debate on post-Brexit migration proposals, even as sterling weakened on growing concern about a no-deal exit.

Today Bank of England rate-setters are due to set out how they think the economy is faring with little more than three months to go before Brexit.

Already a raft of business and consumer surveys are pointing to an end-of-year slowdown.

The Danish parliament is due later to approve a controversial proposal to house some foreign criminals on a tiny island south of the capital.

Lindholm is just 7 acres square and is currently used by scientists from the Technical University of Denmark researching swine flu and rabies among other things.

One ferry travelling to the island is even named “Virus”.

The idea is to put criminals there whose sentence of deportation cannot be carried out because they risk torture or execution in their home country.

The plan has been criticized by the U.N. human rights chief over concerns it will stigmatise and isolate them.


The Fed is struggling to get ahead of market concerns and recession fears.

Even though it packaged its fourth interest rate rise of the year last night as a ‘dovish hike’, by lowering its projections for rate rises next year to two from three, markets had already effectively removed full pricing for any tightening next year.

What's more, the Fed made no adjustment to its ongoing balance sheet reduction – cited by many as a more serious drain on market liquidity.

The net result was a bit of a hawkish shock.

Now, if the Fed is to believed, there will still be three more rates rises between now and early 2020, even though investors are starting to pencil in an economic slowdown all the way into recession over that period.

The most telling price move in that regard overnight is a re-flattening of the 2-10 year U.S. Treasury yield curve to 10 basis points and below, a whisker from the 11-year low set earlier this month and shouting distance from an inversion of the entire curve – traditionally a harbinger of future recessions as long-term rates fall below short maturities.

Ten-year Treasury yields dipped below 2.75 percent for the first time since April.

With that in mind, stock markets on Wall St and around the world have run scared and the bear market signals are mounting.

The S&P500 lost another 1.5 percent after the Fed decision and fell to its lowest level of the year.

This month’s losses of 9.2 percent so far make it the worst December for the index since the depths of the Great Depression in 1931.

The Vix volatility gauge is flashing red and closed above 25 percent for only the third time since the ‘Volmageddon’ shock in February.

The equity market selling spread around the world.

MSCI’s all-country world stock market index fell to its lowest since May 2017.

With losses of 11 percent year-to-date, it’s been the worst year for the index since the crash of 2008. Heavy selling across Asia bourses saw Japan’s Nikkei take the brunt, with losses of almost 3 percent bringing its peak to trough decline this year to 17 percent.

The broader Topix index of Japanese stocks entered ‘bear market’ territory, its decline since the early-year highs now exceeding the 20 percent that typically defines that.

Hong Kong and Seoul were down about 1 percent each and Shanghai, already deep in a bear market, closed down another 0.5 percent.

U.S. stock futures showed now sign of a rebound later and European futures pointed to losses of more than 1 percent at the open. Benchmark German bund yields fell to their lowest in seven months.

The Fed’s inadvertent hawkish tilt failed to lift the dollar, although the slowing world economy is unlikely to allow many other central banks to follow suit unless forced to by currency weakness.

The greenback is likely watching the drop in long-term U.S. treasury yields and the rise in the ‘safe haven’ yen due to stock market stress and recession angst.

Dollar/yen fell below 112 for the first time since October.

Euro/dollar held firm above $1.14.

China’s offshore yuan, hit by the People’s Bank of China’s targeted interest rate cut on Wednesday, weakened slightly.

Emerging market equities, already deep in bear market territory and down more than 25 percent from the peaks of this year, fell back to their lowest in more than a month. Emerging currency indices were a fraction higher.

Sterling continued to hold firm in the face of the Brexit impasse, with just 100 days to go to the scheduled withdrawal from the European Union and no deal yet in sight.

The Bank of England meets later to decide on policy but no changes are expected in the light of Brexit uncertainty.

The Bank of Japan left policy unchanged earlier too.

In corporate news, shares in Russia's Rusal soared 22 percent in Moscow after news that the U.S Treasury will lift sanctions on the core empire of Russian business man Oleg Deripaska – including aluminium giant Rusal and parent EN+.

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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