May 30, 2018 / 7:30 AM / in 3 months

Daily Briefing: A summer election for Italy?

LONDON (Reuters) - Italy may be heading towards snap elections earlier than most had assumed after the ex-IMF official named to appoint a stopgap government struggled even to do that.

Former senior International Monetary Fund official Carlo Cottarelli arrives for a meeting with the Italian President Sergio Mattarella at the Quirinal Palace in Rome, May 29, 2018

July 29 is now being touted as a possible date after Carlo Cottarelli yesterday met the country’s president and then left without making any statement. That only underlined the fact that any government Cottarelli pulls together would be voted down in parliament by would-be coalition partners 5-Star and League.

An opinion poll published this morning showed how the far-right League in particular is benefiting from this showdown with the Italian establishment: support for it is up eight points on its score in the March elections to 25 percent; 5-Star meanwhile is steady on around 33 percent, meaning the two would have a decent majority in a future parliament. The anti-establishment looks increasingly in the driving seat.

While instability in Italy is the biggest potential threat on Europe’s economic landscape right now, next month’s referendum on a radical “sovereign money” plan in Switzerland is becoming more prominent on policy-makers’ radar screens.

The move would upend Switzerland’s traditional monetary system by barring commercial banks from creating new electronic money every time they extend credit: Only the Swiss central bank would be allowed to increase the money supply.

Switzerland risks being plunged into an "unnecessary and dangerous experiment" if it adopts the scheme on June 10, Swiss National Bank Chairman Thomas Jordan has warned. For now, that looks unlikely: A poll released today showed 54 percent of respondents opposed the plan with 34 percent in favour and 12 percent undecided.

Putin’s regime takes aim at those who cannot be broken or intimidated

Investigators in Ukraine are looking into the shooting of a prominent Russian journalist and critic of President Vladimir Putin. Arkady Babchenko, 41, died of his wounds in an ambulance after his wife found him covered in his blood in their home, police said, adding they suspected the murder was due to Babchenko's professional activities.

Babchenko left Russia fearing for his life after criticising Russian policy in Ukraine and Syria. The Russian foreign ministry has issued a statement implying the fault lay with Kiev, saying journalists "were being killed with impunity in Ukraine".

MARKETS AT 0655 GMT

Ukrainian police officers guard as flowers are placed near the entrance to a house where Russian journalist Arkady Babchenko was shot and died of his wounds in an ambulance, in Kiev, Ukraine May 29, 2018

After a withering Tuesday in which a market slump and political standoff in Italy rocked global markets, there are some signs of a breather early on Wednesday.

The worst-case financial scenarios from the Italian hiatus and spiralling government borrowing cost have all been factored in by investors, and the potential damage of re-run of the 2011-2012 euro crisis has unnerved investors worldwide, fearful of banking sector contagion and a hit to business confidence from euro breakup talk.

Wall St stocks and the major Asian bourses all retreated sharply over the past 24 hours, with demands for safety plays evident in hefty bids for U.S. Treasury bonds, German Bunds, Japan’s yen, Swiss francs and other euro satellite currencies.

But as the domestic political story smoulders – with talk of elections as soon as July amid reports stopgap PM Cottarelli will not be able to form a government either – Italian bonds have found something of a foothold first thing this morning.

As Italy prepares to auction five- and 10-year bonds later on Wednesday, the 10-year yield fell back about 10 basis points from yesterday’s closing levels to just above 3 percent and a spread over Germany of 270 basis points - 12 basis points below Tuesday’s peaks. Two-year yields, where much of the dramatic selling was seen yesterday, were some 30 basis points down on the day.

Cottarelli is expected to return later to detail to President Mattarella his plans, and opinion polls show support for both anti-establishment 5-Star and the League either holding up or improving during their failed attempt at forming a government.

On the other hand, credit ratings firm DBRS said Italy’s long average bond maturities made its debt situation still manageable and banks, such as Barclays, issued notes saying the likelihood of an Italian euro exit remained extremely low – not least because the still outside chance of a referendum on euro membership would require a super-majority of two-thirds support to pass.

Markets have also started to speculate about how the European Central Bank will react to further sharp movements in Italy’s debt markets and any sign of stress emerging in its domestic banking sector - the big potential weak link in this market blowout - as factors it could argue compromised the conduct of its euro-wide monetary policy.

Although European stocks were set to tick lower again at the open, Wall St futures were slightly higher as Italian bonds stabilised. Euro/dollar was also firmer at $1.1575, after falling close to $1.15 on Tuesday. Ten-year Treasury yields rebounded to 2.84 percent.

Italy aside, Asia stock markets were also hit by reports the United States planned to push ahead with protectionist trade measures against China and Beijing’s angry reaction. Shanghai was down more than 2 percent, with HK, Seoul and Japan’s Nikkei down more than 1 percent.

In emerging markets, Turkey’s lira traded slightly stronger in a third day of gains as investors gear up for the new interest rate regime coming into force on Friday. However, Moody’s credit ratings firm this morning slashed its Turkish growth forecast to 2.5 percent from 4 percent and said President Tayyip Erdogan’s statement on tightening his grip on monetary policy after elections next month had weakened the central bank’s independence.

— 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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