November 21, 2018 / 8:42 AM / 10 months ago

Daily Briefing: EU-Italy budget standoff hardens

LONDON (Reuters) - The European Commission takes its first step today towards disciplining Italy over its draft 2019 budget, backed by euro zone governments worried that Rome's borrow-and-spend plans could trigger another debt crisis that would hurt them all.

FILE PHOTO: Italian Prime Minister Giuseppe Conte speaks during a joint news conference with Russian President Vladimir Putin in Moscow, October 24, 2018

Alongside the publication around 1100 GMT of its views on the draft budgets of all 19 euro zone countries, it will issue a separate statement that Italy is in breach of EU law that requires a country to bring down its public debt once it is higher than 60 percent of gross domestic product (Italy’s is 131 percent).

Memories of the euro zone debt crisis loom large: other EU capitals argue it showed the need to get public finances in order; Rome insists it would be crazy to embark on austerity when the economy needs a lift.

British PM Theresa May heads to Brussels today to try and tie up some of the loose ends in a draft Brexit deal with the European Union ahead of Sunday's summit. There are still some disagreements over the treatment of Gibraltar, fisheries and trade, notably.

In what is being read as an attempt to win over some of May’s hard Brexit critics, Downing Street said yesterday it was open to looking at their proposed technological solutions to keep the border open on the island of Ireland - the so-called “max fac” option touted by Brexiteers such as David Davis.

The technology itself does not exist yet and the EU dismisses such ideas as “magical thinking”. Yet it is happy to have it included as an aspiration if it helps May - that is precisely why it insists on the backstop.

Austria will host a conference in Vienna today entitled “Europe beyond anti-Semitism and anti-Zionism – securing Jewish life in Europe.” There is some irony in the fact that a government including a party founded by ex-Nazis is holding such a conference at all.

One reason could be that Austrian Chancellor Sebastian Kurz is trying hard to have Israel drop a ban on dealing with ministers from the Freedom Party. Whether the four-hour-long event has much effect remains to be seen: Israeli Prime Minister Benjamin Netanyahu has pulled out, and no one from the Freedom Party will be there.


Some signs of stabilisation in world markets emerged early on Wednesday after another tumultuous day saw the main three Wall Street stock market indices wipe out all gains for the year and oil prices drop to their lowest levels of the year amid fears of ebbing world growth.

The technology sector reversal, led by Apple and the big internet stocks, reflects the fears of peak earnings and growth, but the plethora of risks influencing the market are now casting a cloud over 2019, with everything from Brexit, Brent, BTPs and Bitcoin in the mix alongside trade wars and technology tremors.

The Vix U.S. equity market volatility gauge closed at its highest level of the month last night at 22.48 and will keep sentiment fragile despite the calmer start to Wednesday and the Thanksgiving holiday in the United States on Thursday.

Asia bourses found a foothold, with Shanghai little changed and Hong Kong 0.5 percent higher.  Tokyo’s Nikkei and Seoul’s Kospi both ended in the red again, however, even though U.S. and European stock futures point to something of a modest recovery later. European shares rebounded following a five-day losing streak that dragged the pan-regional STOXX 600 index closer to the near two-year lows hit in October.

After hitting a 2018 low of $61.71 on Tuesday as news of rising inventories met the global demand worries, Brent crude prices firmed a touch to $63.40 first thing. U.S. Treasury yields pushed back up to 3.08 percent, while the dollar was higher against the yen but weaker against the euro and emerging-market currencies.

Italian government bond yields retreated from Tuesday’s one-month highs ahead of today’s European Commission announcement on how it plans to deal with Italy’s expansionary budget. Sterling gained as UK PM May headed to Brussels to discuss with EU Commission chief Juncker the country’s post-Brexit relationship with the bloc .

On the corporate news front, Italian banks will be closely watched and set for further volatility as the European Commission prepares its response to Italy's draft budget, while UniCredit could get a lift from a report it is looking at splitting into two entities.

David Davis, the former Secretary of State for Exiting the EU, attends a meeting of the pro-Brexit European Research Group in London, November 20, 2018

Eyes also on Greek stocks after Reuters reported that Greece is at risk of missing a first tranche of ECB profit returns on Greek bond holdings due to delays in the pace of privatisations despite over-performance on its fiscal targets.

Some earnings updates including from industrial conglomerate ThyssenKrupp and Italian insurer Generali could also liven up the session. Thyssenkrupp forecast profit from its continuing operations would grow 42 percent in 2019 in a bid to lure investors back, although adjusted EBIT in 2018 missed estimates and its shares were seen down 1 to 2 percent in premarket. The Italian insurer raises its dividend payout and forecast higher earnings growth ahead, lifting its shares in pre-market.

— 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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