April 24, 2020 / 8:30 AM / a month ago

Daily Briefing: Italian job - botched?

LONDON (Reuters) - EU leaders finally agreed to build a trillion-euro emergency fund to finance recovery from the coronavirus pandemic. But while they managed to avoid another all-night bust-up, they have left the more divisive details until the summer.

A man looks at a restaurant menu in Rome, April 23, 2020. REUTERS/Guglielmo Mangiapane

Italian PM Giuseppe Conte hailed "great progress" after they summit ended but markets seem less sure. Progress was slower than feared; plus the size, speed and structure of the recovery fund remains unclear.

Little surprise then that the euro is stuck near one-month lows and the closely-watched Italian/German 10-year bond yield spread — essentially Italy’s risk premium - is at 255 bps (and widening) versus 236 bps late Thursday.

Markets are concluding perhaps, that barring a more ambitious deal, the ECB will remain the only game in town to “close spreads”. Ironically that’s the role Ms Lagarde tried to eschew at the central bank’s last policy meeting.

Italy also faces another test on Friday when S&P Global reviews its BBB credit rating - just two notches away from junk. Even if it dodges a downgrade tonight, the risk looms large in the months ahead given a deteriorating debt and budget picture.

A document seen by Reuters shows the government targeting a 10.4%-of-GDP budget deficit this year, with public debt rising to 155.7% of GDP.

In a sign of worsening ratings outlook for European sovereigns, Fitch late on Thursday cut Greece’s outlook to stable from positive.

On stock markets, European share indexes are down 1%-2% following on from weakness in Asian shares, U.S. futures and last night's Wall Street losses that were spurred by doubts about progress in the development of drugs to treat COVID-19.

European bank shares are down more than 2% after S&P cut Commerzbank ratings and lowered Deutsche Bank’s outlook to negative from stable on expectation of significant weakening in earnings and asset quality.

Food and pharma stocks are holding their own however, with French supermarket Casino seeing strong first-quarter sales, while Nestle and Sanofi too posted good results thanks to customer stockpiling of food and fever medicines respectively.

In emerging markets, Russia is expected to cut interest rates by 50 bps to 5.50%; boasting the highest ‘real’ interest rates of all countries with net foreign assets worldwide, it can afford to continue doing so.

Members of the Russian Emergencies Ministry spray disinfectant inside Kiyevsky railway station in Moscow, April 22, 2020

But the rouble, while 10% off mid-March lows is still 18% down since oil prices started falling in January. Brazil’s real is languishing at record lows. MSCI’s pan-emerging market equity index is down 0.8% on the day and 1.8% for the week, snapping two straight weeks of rises

Capital flight from Latin America’s oil-producing nations is nearing record levels, with equity and debt markets in Mexico, Brazil and Colombia experiencing historic outflows in recent weeks, the Institute of International Finance says.

For oil markets, one of the most tumultuous weeks ever is almost over. Crude looks set to end the week on a firmer note than it started, with fresh gains after producers such as Kuwait said they would cut output.

Still, Brent is headed for a more than 20% loss this week, with U.S. West Texas Intermediate set for a fall of around near 8%.

The dollar is headed for its best week since early April, as euro zone divisions weigh on the euro and oil weakness drags on commodity currencies. The dollar index is near 2-1/2-week highs.

The greenback is up nearly 3% this week versus the oil-sensitive Norwegian krone and about 1% on the euro.

— A look at the day ahead from Dhara Ranasinghe, senior markets correspondent, EMEA. The views expressed are her own —

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