LONDON (Reuters) - The European Commission will discuss Italy’s budget plans at its meeting later today, with some in the Italian government expecting it will take the unprecedented step of rejecting the plan and demanding changes.
Italy’s bond yields have ticked up this morning ahead of the meeting, but whatever happens in the weeks ahead, some are already trying to take the drama out of the stand-off.
Mario Centeno, the Portuguese head of the Eurogroup of eurozone finance ministers, says he is confident that agreement can ultimately be reached.
Italy told the Commission on Monday it would stick to its contested 2019 budget plans in defiance of European Union fiscal rules, but promised not to inflate its deficit any further in the years ahead.
Centeno told Reuters that while Rome had to stick to the rules, “we also don’t need to be dramatic”.
He pointed to his own Socialist government in Portugal as an example of an administration that won the confidence of markets and investors after it made clear it intended to stick to European budget rules after coming to power in 2015.
Whether or not fiscal conservatives in Germany and elsewhere agree with him, is perhaps another matter.
UK Prime Minister Theresa May holds a cabinet meeting today in a slightly less fragile position than she was in 72 hours ago.
The furore over nasty, anonymous quotes in weekend media attributed to pro-Brexit party critics demanding her political "assassination" has helped undermine their rebellion plot: it seems she has not been summoned to face angry lawmakers at the powerful 1922 committee this week, and a series of amendments aimed at making Brexit talks even harder have been withdrawn.
The hard Brexiteers may have also judged that parliamentary arithmetic remains against them at this stage - both for their planned amendments and any future leadership challenge to May.
Optimism about a fiscal boost in China and relief over Moody’s outlook on Italy only offered a brief respite against the backdrop of trade-related economic drags, a high bar on corporate earnings projections and gnawing political concerns from the U.S. mid-term elections, Saudi Arabia’s rift with Western powers and the Brexit-inspired threats to the position of UK PM May.
The S&P500 fell for the fourth straight day on Monday, losing 0.4 percent in its 11th daily drop in 13 trading days.
MSCI’s all-country index was down for the fifth consecutive day on Tuesday.
While aggregate Q3 earnings growth is expected to come in just over 20 percent again, much is already in the price and there are nerves about the hit to industrials and tech from rising Sino-U.S. trade tensions.
Halliburton dropped 3 percent on Monday after warning about difficulty in the U.S. fracking market and Caterpillar is due out later.
Amazon, Alphabet and Microsoft all report later in the week.
Volatility gauges remained elevated with the Vix index nudging back up to 20 percent.
The overall damage to risk sentiment filtered through Asia, with Chinese, Japanese and South Korean equity benchmarks all losing more than 2 percent.
The darkened mood lifted the dollar more broadly, with perceived currency havens such as the yen and Swiss franc outperforming again.
Sterling was back below $1.30 for the first time in more than two weeks amid doubts about PM May’s ability to sell a Brexit deal to her own Conservative Party and their Northern Irish partners the Democratic Unionist Party.
More broadly, there’s growing concern that with many global equity indices in technical ‘bear market’ territory already this year, we are entering a period of selling rallies rather than buying dips.
Rather than some big bubble burst that many have feared for years, the air is already gradually seeping out of this bull market and the funk could persist for many months if not years.
European and U.S. stock futures were down more than 1 percent first thing.
European shares are set to touch levels not seen for two years as Q3 earnings stream in.
Italian yields pushed back higher after a relief rally in BTPs on Monday when credit rating firms Moody’s lifted its sovereign credit outlook to stable after cutting the rating to one notch above junk.
The European Commission is due to decide on Tuesday its next steps with regard to Rome’s controversial deficit-expanding budget.
The Italian government said it would stand firm and explain its case thoroughly, but daily newspaper Il Messaggero reported on Tuesday that the coalition is prepared to adjust measures in its contested 2019 budget should markets react negatively and the yield spread between compared to Germany spike.
Eurogroup head Centeno told Reuters late Monday he was confident an agreement between Brussels and Rome would be reached and initial soundings were “very positive” from both sides.
In corporate news, plenty of third-quarter earnings.
Swedish defence firm Saab was down 15 percent as after its earnings and as it announced a $665 million rights issue to bolster its balance sheet.
In another bearish sector, banking, Swedbank net profit beat forecast.
It’s not looking good for money manager GAM which is seeing an asset exodus.
Other bellwethers for the region include Dutch staffing Randstad.
Good earnings in tech lifted the Nasdaq on Monday and it is yet to be seen if the sector can lift Europe too.
Computer accessory firm Logitech confirmed its 2019 outlook after rising sales while France’s Atos and Ingenico lowered their outlooks.
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 Andrew Heavens