October 2, 2018 / 7:25 AM / 2 months ago

Daily Briefing: Rome warned it could trigger new euro crisis

LONDON (Reuters) - Claudio Borghi, the economic head of Italy’s ruling League party, has sent bond yields up this morning with a comment that the country would be better off if it returned to the lira.

FILE PHOTO: A silver reproduction of a 500 Italian lira coin

That came after euro zone officials last night warned Rome its plan to borrow billions of extra euros to fund spending pledges could tip the single currency region back into crisis, signalling that they would put pressure on Italy's new rulers to change course.

Its 2019-2021 budget targets are due to be finalised later today, with the 5-Star coalition partner insisting that the 2019 deficit remain at the 2.4 percent/GDP mark which has got financial markets so worried.

Today it is Boris Johnson's turn to speak at the Conservative Party's annual conference in what some in the local media are portraying as a "put up or shut up" moment for the former foreign secretary and his leadership ambitions.

A photograph released this week of him running through a field of wheat - a blatant jibe on Theresa May’s self-confessed “naughtiest” moment as a child - might make his fans giggle but some in the party offer it as proof that he is not leadership material.

Clashes between police and Catalan independence supporters in Barcelona last night show the issue has lost none of its potency a year on from the illegal referendum of 2017. Polls in Catalonia show a relatively even split between those who favour remaining in Spain and those wanting to secede.

Prime Minister Pedro Sanchez has said he favours dialogue on the region’s future but like his predecessor has ruled out any moves towards independence. Today the regional parliament is due to vote on whether former Catalan President Carles Puigdemont and several members of his government can keep their seats as lawmakers while still under investigation or in prison under charges of rebellion.

MARKETS AT 0655 GMT

Market fears that Italy’s budget standoff would inevitably lead to a rise in euro exit speculation were realised again after a senior figure within the ruling League party, Claudio Borghi, who chairs the lower house budget committee, said many of Italy’s economic problems would be solved with its own currency.

Already restive bond markets, unnerved since last week’s unveiling of a higher-than-expected 2.4 percent budget deficit target for next year and the early exit on Monday of finance minister Tria from euro group meetings in Luxembourg, took fright again first thing today.

Critically, the 10-year Italian government bond yield broke above May’s post-election peaks to hit its highest level in 4-1/2 years. The yield spread with Germany rose to within 4 basis points of May’s peak.

Euro/dollar fell about 0.4 percent to hover just above last month’s lows and reigniting dollar strength across the board. The latest Italian jolt has European stock futures pointing lower too, with Italian banks expected to take the heat from the fresh jump in the sovereign debt spreads. While Borghi may be an outlier, his comments reflect a sharpening of language and a rise in confrontational statements from the ruling coalition.

Deputy PM di Maio on Monday described any European Union criticism of Italy’s latest budget proposals as attempts at “creating terrorism on the markets” and on Tuesday insisted the 2.4 percent deficit target would stand, with details finalised on Tuesday. He said French President Macron and German Chancellor Merkel wanted Italy’s government to fail.

The sour mood in Europe offset optimism on Wall St overnight over weekend agreements to preserve NATFA as a trilateral trade agreement. But the clouds darkened in Asia amid concerns about a worldwide slowdown in economic activity.

IMF chief Lagarde on Monday flagged a likely cut in the Fund’s latest world economic growth forecast next week and the latest global manufacturing surveys from around the world signalled a significant cooling of factory output last month. JP Morgan’s global manufacturing output PMI fell almost a full point to its lowest level last month since September 2016.

Shanghai markets remained closed for the week, but other Asia bourses were lower. A re-opened Hang Seng dropped more than 2 percent and Seoul’s Kospi lost more than 1 percent. MSCI’s emerging market equity benchmark staged its biggest one-day drop in almost a month.

A woman screams as protestors confront police in front of the Catalonian parliament at the end of a demonstration on the first anniversary of Catalonia's banned independence referendum in Barcelona, October 1, 2018

The stronger dollar pushed many emerging market currencies back lower, with a slide in Indonesia’s rupiah to its lowest since 1998 the standout move as the country comes to terms with the weekend’s devastating earthquake and tsunami.

The latest surge in world oil prices has added to growth worries, with Brent crude oil prices soaring to new 4-year highs above $85. Ten-year U.S. Treasury yields slipped first thing Tuesday, with eyes on a speech by Fed chair Powell and several other Fed policymakers later in the day.

— 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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