May 24, 2018 / 7:49 AM / 5 months ago

Daily Briefing: "Italy First", new PM promises

LONDON (Reuters) - With a dramatic pledge to be the "defence lawyer of the Italian people", academic and political novice Giuseppe Conte welcomed last night his appointment as prime minister of a 5-Star-League coalition government in Rome.

Newly appointed Italy Prime Minister Giuseppe Conte arrives to speaks with media after the consultation with the Italian President Sergio Mattarella at the Quirinal Palace in Rome, May 23, 2018

The little-known Florence law professor will now take a few days to draw up a list of ministers for an administration he said would prioritise the national interests of Italy on matters ranging from European Union budget talks to asylum law. Financial markets will watch closely whether Conte goes with the League nomination of 81-year-old eurosceptic Paolo Savona for the powerful position of economic minister.

That prospect had already sent Italian debt yields leaping earlier this week, but a source close to President Sergio Mattarella - who has a veto on ministerial choices - says he has made it clear he does not want a eurosceptic in that post.

The European Central Bank publishes minutes of its April policy meeting today just as weak data on the euro zone economy prompt questions over whether the ECB can still withdraw from its stimulus programme later this year as planned.

This morning’s GfK survey showed that German consumer sentiment deteriorated further heading into June, reaching the lowest level so far in 2018, while the second official estimate of first-quarter German growth was confirmed at an underwhelming 0.3 percent.

Still, for now a Reuters poll shows that an overwhelming majority of economists still expect the ECB to end purchases by the end of the year - even though they do not expect inflation to hit the ECB's target until at least 2021.

Yesterday's surprise fall in UK April inflation has added to similar question marks over when the Bank of England will next raise its interest rates. Two weeks ago, the BoE held back from an increase that had been widely expected at one point, as it waited to see if the economy's weak start to the year simply reflected heavy snowfall.

Most economists still think the BoE is on track to raise rates in August, but they will be scrutinising Governor Mark Carney’s address to them at the profession’s annual dinner in London this evening.

MARKETS AT 0655 GMT

World stock markets remain on the back foot due to fresh worries about U.S. protectionism as Washington launched a national security probe into auto imports. The overnight move, which hit auto stocks in Asia and knocked Japan’s Nikkei by more than 1 percent, comes amid anxiety about spluttering euro zone growth.

May business surveys released on Wednesday disappointed again and questioned hopes for a second-quarter growth rebound in the region, forcing some – such as JPMorgan - to push back forecasts for a European Central Bank interest rate rise next year.

The combination of more belligerent U.S. trade action and anxiety over slowing European growth spurred a retreat from all risky assets on Wednesday, lifting traditional havens such as U.S Treasury bonds, the yen and gold.

U.S. Treasury yields fell further after the minutes of the Federal Reserve’s latest meeting were read as relatively dovish – pointing to further interest rate rises but emphasising the leeway the Fed should retain even if inflation was above target. The dollar has eased back somewhat today, too.

Turkey’s central bank was eventually forced into an emergency interest rate rise late on Wednesday to support the plummeting lira – lifting the effective ceiling for its money rates, the late liquidity window rate, by 300 basis points to 16.5 percent but leaving all other main rates unchanged. The currency quickly recovered an earlier 5 percent plunge, but failed to get much beyond Tuesday afternoon levels and had weakened again early on Thursday.

Markets reckon the central bank move was the minimum necessary and came too late to prevent the lira’s slide feeding higher inflation, amid statements surrounding the move suggested it was a one-off.

The questions now are whether there is support for the central bank to do what’s necessary to stabilise the currency before a June 24 election and how much resistance came from President Erdogan. Many are mindful of Argentina’s failed interest rate battle to stabilise its peso over the past month and how it was eventually forced to go the International Monetary Fund for assistance.

Italy’s bond market made another stab at recovery this morning with BTP futures jumping at the open and two-year bond yields down sharply. Italian President Sergio Mattarella last night gave political novice Giuseppe Conte a mandate to lead the first government in Italy made up of anti-establishment parties.

There are some hopes that after accepting Conte, Mattarella might now put up a fight over the choice of economy minister, a key post for markets. 

— 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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