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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Italian PM pledges to avoid Italexit, but markets fall - as it happened

Italian Premier Giuseppe Conte answers reporters’ questions during a press conference at the foreign press club in Rome today
Italian Premier Giuseppe Conte answers reporters’ questions during a press conference at the foreign press club in Rome today Photograph: Gregorio Borgia/AP

Markets close lower amid Italian worries

And finally, European stock markets have ended the day in the red.

The early optimism, following China’s best day in a couple of years, burned off by the close of trading.

The FTSE 100 ended 7 points lower at 7,042, a drop of just 0.1%.

But Italy shed 0.6%, as traders braced for the EU to demand a budget rewrite tomorrow. Giuseppe Conte’s pledge to avoid an Italexit wasn’t enough to spark a rally.

France also lost 0.6%, while Spain was down almost 1%.

Over in New York, the Dow Jones industrial average has lost 131 points by lunchtime, a drop of 0.5%. However the Nasdaq tech index is up almost 0.4%.

That’s probably all for today. Goodnight! GW

Trader Mark Puetzer works on the floor of the New York Stock Exchange today.
Trader Mark Puetzer works on the floor of the New York Stock Exchange today. Photograph: Richard Drew/AP

The pound is still suffering the Brexit blues, down almost one cent tonight.

Sterling held onto its losses, as prime minister Theresa May urged MPs to hold their nerve, as 95% of the deal with the EU was in place.

The news that her DUP partners might rebel over the remaining 5%, though, has worried the City.

Ricardo Evangelista, senior analyst at ActivTrades, says:

The Pound is down 0.8% on the day, dropping below the $1.30 psychological level for the first time since early October, following news that the Democratic Unionist Party, a key partner in parliament to the government of PM Theresa May, will back a proposal by rebel Tory MP’s to legislate in order to block an eventual post-Brexit Irish border back-stop agreement with the EU.

The new development makes a no-deal Brexit scenario more likely and sterling is struggling to find support, as the markets move to price-in the new development.

At least one European neighbour is agitating for the EU to reject Italy’s budget, points out the Financial Times:

Italy’s budget policy was sharply criticised by Sebastian Kurz, Austria’s chancellor, who said on Monday that Brussels should reject Rome’s plans unless there was a rethink.

“Austria is not prepared to stand behind the debts of other states while those states are actively contributing to market uncertainty,” said Mr Kurz. The EU “must show it has learnt from the Greek crisis”, he said.

Austria holds the EU’s rotating presidency.

Hartwig Löger, Austria’s finance minister, said Italy’s populist debt policy would be “taking the EU hostage” if Brussels did not act.

Italy’s refusal to change its budget plans for 2019 mean a clash with the EU later this week seems inevitable.

Brussels is expected to tell Rome that its planned structural deficit is too large, and demand a rewrite.

My colleage Angela Giuffrida watched Conte’s press conference earlier, and explains:

Italy refused to compromise on its economic targets, sending a letter to Brussels on Monday explaining why it will raise its deficit – the gap between government spending and income – to 2.4% of GDP. The prime minister, Giuseppe Conte, told reporters in Rome that the government was not being led by “a bunch of hotheads” and that the increased borrowing was needed to ensure that Italy’s economy grows.

Conte said the government, made up of a coalition of the anti-establishment Five Star Movement and the far-right League, would need €17bn (£15bn) to fund election campaign promises including tax cuts, a universal basic income and pension reforms.

“We studied this for a long time and concluded that if we had continued on the same road, Italy would have entered into a recession,” Conte said.

Investors are still jittery about Italy’s budget, despite the government’s attempts to calm the situation today.

Dan Smith, Investment Analyst at Thomas Miller Investment, explains:

With the Italian government taking an uncompromising stance to its budget thus far, the events this week could provide the litmus test for the European Commission’s ability to police national budgets. It remains a tough balancing act for Brussels; push too hard and risk strengthening eurosceptic sentiment in Italy, but too lenient a stance risks a counter reaction from other European members that comply with the rules.

Investor sentiment around Italian assets has deteriorated in recent weeks and with debt rating agencies issuing downgrades (with more set to come), we are at a particularly precarious moment.

Greek insider: Greece is not Italy

The developments in Italy today have brought smiles to the faces of Greek officials across the Ionian sea.

Italian prime minister Conte’s pledge not to quit the eurozone was a reminder of the Greek crisis three years earlier.

Market turmoil in Italy has hit Greek bank shares hard in recent weeks. The governor of the Bank of Greece, Yiannis Stournaras, blamed the dramatic drop in the share prices of Greek lenders to events in the neighbouring nation.

Even worse for a country that has pinned its hopes on returning to international borrowing markets after exiting its third and final bailout programme in August, Greek bond yields have followed the trajectory of Italy bonds.

This has highlighted Athens’ continued, and acute, vulnerability to what Stournaras described as “exogenous factors ... in Greece’s neighbouring countries in particular.”

A senior Greek finance ministry official said:

“Our priority has been decoupling the situation there and here ... Greece is not Italy and should not be perceived as such abroad.”

Updated

The Wall Street rally is fizzling out too..

Not so fast! Italy’s stock market has lost its early gains, sending the FTSE MIB down 0.6%.

Bank shares are dropping -- perhaps investors are worrying about how much Italian government debt they own....

There’s green on the boards as Wall Street opens:

Wall Street at the open
Wall Street at the open Photograph: Bloomberg TV

With the Chinese market surging by 4%, and Europe also higher, it’s a positive start to the week.

David Madden, analyst at CMC Markets, says the “bullish sentiment” from China has spilled over.

Dealers are cautiously optimistic as questions still hang over Italy’s financial health. Moody’s have downgraded Italy’s credit rating to one notch above junk status, but the agency lifted its outlook to stable from negative, so investors aren’t afraid of another downgrade in the near-term.

Just in, Supermarket group Wm Morrison has lost a legal battle against thousands of supermarket staff whose personal details were posted on the internet.

Morrisons now faces a potentially “vast” compensation payout, after losing a court of appeal case today, Press Association says.

The case was brought after the payroll data of around 100,000 employees was leaked on the internet, including names, addresses, and bank account details. This potentially exposed Morrisons staff to identity theft and fraud.

Andrew Skelton, the internal auditor who leaked the information, was jailed for eight years in 2015.

Wall Street is expected to follow Asia and Europe’s lead by rising when trading begins in 25 minutes:

Here’s Bloomberg’s latest take on Italy:

Italy’s populist government promised it won’t let its budget deficit widen further than currently planned and called for dialogue with the European Union to address their differences.

In a letter to the European Commission published Monday, Finance Minister Giovanni Tria said the government is ready to act to ensure it doesn’t exceed the 2.4 percent target for 2019. He said he’s aware that his spending plans don’t comply with EU rules and he wants “constructive” talks with officials in Brussels. Prime Minister Giuseppe Conte, speaking in Rome, said the deficit target should be seen as an upper limit and it could still be narrower.

The decision to increase spending was “difficult though necessary,” Tria said in his letter. He cited slow economic growth and the “difficult economic situation the poorest segments of the Italian society are facing.”

Back in the City, the pound has dropped back below $1.30 for the first time in over two weeks.

It’s a fall of 0.65%, or nearly one cent.

And that’s because Theresa May has a fresh Brexit hurdle to struggle over. The DUP, who are propping the government up, are reportedly planning to block the Northern Ireland Brexit backstop....

In his Politics Live blog, Andy Sparrow says this isn’t entirely shock (the DUP are opposed to anything that splits Northern Ireland from the rest of the UK), but it does ratchet up the pressure on Downing Street.

Italian PM: Read my lips, Italexit isn't happening

Boom! Italy’s prime minister has insisted that his country will not follow Britain out of the European Union.

Harking back to George Bush (senior) 30 years ago, Giuseppe Conte told reporters in Rome to “read my lips”. Italy will not exit the eurozone despite the dispute over its budget plans, he declared.

Reuters has more details:

Prime Minister Giuseppe Conte defended on Monday Italy’s 2019 budget, which has fallen foul of the European Commission, saying the failure of previous efforts to stimulate the economy meant a new approach was needed.

In a wide-ranging news conference, Conte said he wanted constructive dialogue with the Commission over the contested fiscal package, and predicted that growth would “take off” once government reforms were implemented.

He pledged that next year’s deficit would not exceed 2.4 percent of gross domestic product (GDP) and dismissed any suggestion that Italy might have to abandon the euro currency or leave the European Union.

The ‘read my lips’ pledge may be a hostage to fortune, though.

Bush famously promised not to impose new taxes before winning the presidential election in 1988, but later agreed to a budget which raised taxes after the US deficit widened.

That u-turn was roasted in the media - the front page of the New York Post declared “Read my lips... I lied!”. It probably helped to cost Bush the 1992 election to Bill Clinton.

Economics students at Liverpool University are studying the Italian situation today, and make an important point.

Italy may be relieved to still have an ‘investment-grade’ credit rating, but that doesn’t remove the dangerous feedback loop between the banking sector and the government...

They say:

Moody’s decision to downgrade Italy to one level above junk status has, so far, not triggered panic. In fact, Italy’s borrowing costs wend down. There is a good reason for this. Investors are relieved to see Italy avoiding a junk status because Moody’s is considered more conservative (in the sense that it gives more inferior ratings) than other Rating Agencies.

Since Moody’s has not relegated Italy to junk status, it is more likely than not that other Rating Agencies won’t push Italy to the ‘junk abyss’.

On the negative side, however, the downgrade should serve as a (disturbing) reminder of the ‘dangerous embrace’ between Italy and its banks: Italian government debt accounts for as much as 19% of the assets of Italian banks, compared with 12% exposure of Portuguese banks to domestic debt and (only) 6.4% exposure of Greek banks to domestic debt.

Interlinkages between sovereigns and banks in Eurozone
Italy is the fifth-highest column Photograph: ECB

So any further stress to Italian yields will be transmitted immediately to Italian banks which will then increase the risk of severe contagion effects to Eurozone’s periphery...

And here’s the third-year class, who are studying Financial Crises and Defaults, with professor Costas Milas:

University of Liverpool students

Updated

Italian Prime Minister Giuseppe Conte holds a news conference today
Italian Prime Minister Giuseppe Conte holds a news conference today Photograph: Max Rossi/Reuters

Giuseppe Conte has told reporters in Italy that growth will “take off” once his government’s tax and spending plans are implemented [unless Brussels demands a rewrite...].

Defending the deficit plans, the PM says that this extra borrowing will be used to fund investments.

Technically, the budget includes the cost of various election campaign promises made by the two parties who form Italy’s new coalition - including a universal basic income, tax cuts and pension reforms.

But there’s little argument that Italy does need a growth spurt, having underperformed its rivals since the financial crisis.

italygrowth

Prime minister Conte has also promised that Italy certainly won’t run a deficit over 2.4% of GDP next year. It might even be lower....

Updated

Italy defends budget plans

Just in: Italy is attempted to calm the dispute with the European Commission over its tax and spending plans.

In a letter to the EC, economy minister Giovanni Tria says the Italian government is “conscious” that its 2019 budget isn’t in line with Europe’s stability pact, because its structural deficit [2.4%] will exceed the EU target [2%].

This is a “hard but necessary” decision, he says, showing that Rome is sticking to its plans.

But...in a bid to ease the EC’s collective blood pressure, Tria says Italy doesn’t intent to swell its structural deficit any further in 2020 and 2021, and pledged to hold “constructive and loyal dialogue” with Brussels.

Significantly, Tria also promises to take “all necessary measures” if Italy’s debt and deficit levels don’t hit Rome’s targets [the 2019 budget is based on some rather optimistic growth forecasts]

The letter also reiterates the Italy is committed to remaining in the eurozone, and doesn’t want to put financial stability at risk.

Prime minister Giuseppe Conte is also defending the budget:

Pound dips as Brexit anxiety grows

Sterling has lost ground this morning, as the UK government limbers up for yet another crunch week for Brexit.

The weekend papers were full of warnings that Theresa May has just days to save her premiership (something of a recurring theme for the embattled PM, of course). She’s no closer to finding a Brexit deal that can win the support of her cabinet, let alone the UK parliament.

The tone of the debate continues to plumb the depths, with one unnamed MP claiming that May should ‘bring her own noose’ to a meeting of backbench MPs this week. Rightly, that has caused outrage in Westminster.

May is expected to tell the House of Commons today that the Brexit deal is 95% agreed. Unfortunately for her, that 5% include the Irish backstop, which is threatening to blow the faultlines in the cabinet wide open.

And Brexit, like an aircraft, won’t fly if it’s only 95% complete.

So traders are piling out of the pound, sending it down half a cent to $1.302.

Bundesbank: German economy may have stalled

A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany.
A German flag flies in front of the Bundesbank headquarters in Frankfurt, Germany. Photograph: Bloomberg/Bloomberg via Getty Images

Just in: Germany’s central bank has warned that the country’s economy has endured a rough quarter.

The Bundesbank believes that growth may have stalled in the last three months, partly due to lower car production as auto makers struggle to embrace tough new emission tests.

In its monthly report on the German economy, it says:

Although the economic upswing in Germany is essentially still intact, it may have come to a temporary halt in the third quarter of 2018.

According to the Bundesbank’s latest Monthly Report, this was mainly due to a substantial fall in production by car manufacturers.

Europe’s new motor vehicle emissions certification system was brought in after the Volkswagen test-rigging scandal. Some manufacturers have hit serious problems meeting the new rules, forcing them to suspend production of some models while they get certified (a bottleneck at the testers hasn’t helped either).

Those Chinese stimulus hopes are also pushing commodity prices up this morning.

Copper has jumped to a one-week high, after president Xi tried to reassure China’s companies that he was behind them.

Reuters has the details:

Benchmark copper on the London Metal Exchange was up 1.2% at $6,292 a tonne.

“The news from China is encouraging for metals,” said Eugen Weinberg, analyst at Commerzbank.

“Measures that add liquidity will help in the short to medium term, but it won’t solve the problem of indebtedness, a problem for some years now.”

Italian bonds rally as EU battle looms

Italian government bonds are strengthening this morning, on hopes that a full-blown battle with Brussels can be avoided.

Deputy prime minister Luigi Di Maio, who leads the anti-establishment 5-Star Movement, has insisted today that his government will not leave the euro. It is expected to publish a letter later today, outlining its response to the EU’s concerns over its 2019 budget.

Rome is sticking to its plan to run a deficit of 2.4% of GDP next year, breaching the EU’s budget rules.

But the markets don’t seem worried that Moody’s downgraded Italy last week to Baa3, one notch above Junk. There is some relief that Italy still has an investment-grade rating - just!.

So Italian bond prices are rising, pulling down the interest rate (or yield) on its debt.

Many analysts expect the EU will instruct Rome to redraw its budget, with a smaller deficit.

Commissioner Pierre Moscovici argued today that Italy must stick to EU rules, saying:

“When you are an EU member and a member of the single currency, of the euro zone, you must respect a number of joint rules.

Yes, that’s the same Moscovici who ran the French finance ministry when France, errr, overshot EU budget targets.

O’Leary predicts more airlines will fold

More airlines are likely to collapse in the next few months, as the rising oil price hits earnings.

So claims Ryanair’s Michael O’Leary this morning, as he reported a 7% drop in profits in the last six months.

O’Leary told Bloomberg TV that “the doo-doo has hit the fan” recently, with crude prices having risen from $57 per barrel to over $80 in the last year.

Rising fuel costs have dragged down Cypriot carrier Cobalt last week, the Danish carrier Primera Air and the Swiss airline SkyWork in the last two months.

O’Leary admitted that “frankly” he hopes more rivals will disappear this winter, adding that Ryanair is better hedged against rising oil prices.

On Brexit, O’Leary predicted that Britain will avoid a no-deal hard Brexit, by agreeing a 21-month transition programme.

In a “worse-case” scenario, UK airlines might be blocked from landing in the EU in the days immediately after Brexit, he added. But that prospect of seeing planes grounded would force the UK to ‘stumble’ into a transition deal, otherwise the government would fall, he predicted.

Donald Trump’s trade war, and the wider economic slowdown in China, are creating a real headache for policymakers.

While a stimulus package might boost growth, it could also undermine Beijing’s attempts to limit risky borrowing and ‘deleverage’ the economy.

This is creating a lot of anxiety among the Chinese leadership, according to Xu Jianwei, senior China economist at French bank Natixis.

He says (via the South China Morning Post):

“One of Beijing’s top priorities for this year was deleveraging, but that policy has shifted gradually because there are more serious problems.

“If deleveraging continues, many Chinese companies may die in the process. But if deleveraging slows down, the financial risks will continue to pile up. So regulators are for sure very worried, and I don’t think they have found a particularly good way out of it.”

European stock markets have begun the new week with small gains, helped by the rally in China.

Britain’s FTSE 100 is 10 points highers, while Italy’s FTSE MIB has jumped by almost 1%.

China’s stock market has closed for the day, with its biggest surge in three years.

The CSI300 index ended the day 4.3% higher at 3,270, its biggest rise in almost three years, thanks to the flurry of reassuring noises from Chinese politicians and officials.

The Shanghai Composite index, another benchmark, leapt by 4.1% - its biggest one-day gain since March 2016.

President Xi Jinping pledge to always support private firms helped fuel the rally, says Yang Hai, an analyst at Kaiyuan Securities, who believes the market will rebound further - especially with tax cuts on the horizon.

The Chinese government’s “verbal support for the economy and markets” has created a risk-friendly mood to start the week, says Kit Juckes of Societe Generale:

Reassurance from the Chinese leadership that they will support the economy have triggered the biggest one-day increase in equity indices since 2015 and has given markets everywhere a risk-friendly bias to start the week.

PBOC advisor hints at large tax cuts

A top Chinese central bank official has hinted that Beijing could unleash hefty tax cuts to keep its economy on the road.

Ma Jun, advisor to the People’s Bank of China, declared that tax cuts in 2019 could be worth over 1% of gross domestic product (GDP).

Ma also declared that the Chinese financial sector would support businesses -- backing up presidents’ Xi’s pledge.

He said PBOC would encourage banks not to discriminate against private firms, in favour of state-owned ones. The government will also roll out a guarantee fund to support private enterprises, he added.

Craig Erlam of foreign exchange firm OANDA says Chinese traders have welcomed Beijing’s pledge to protect the corporate sector:

President Xi added his name to the list of those vowing to support private firms over the weekend, giving investors reason to pile back in to battered Chinese stocks.

The Shanghai Composite had fallen more than 30% from its peak this year prior to Friday’s comments, which has been the clearest sign so far that tariffs are biting.

The tariffs may not yet be taking their toll on the trade data but as long as the stock market continues to take a beating and growth stalls – as the data last week showed – Trump will be confident that the measures are effective and continue to threaten to double down until he wins concessions.

There’s still a long way to go in this particular trade spat it would seem.

Updated

Every sector on the Chinese stock market has rallied hard today, thanks to president Xi’s pledge to support businesses.

Healthcare and technology stocks led the way:

Chinese stock market by sector today
Chinese stock market by sector today Photograph: Thomson Reuters

Introduction: China's stock market surges 4%

Nanjing Road, in Shanghai, China
Nanjing Road, in Shanghai, China Photograph: Alamy Stock Photo

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

2018 has been a grim year for China’s investors, but perhaps things are finally looking up.

The Chinese stock market has surged by over 4% today, on track for its best day since 2015, after President Xi Jinping vowed “unwavering” support for the country’s private sector.

In a clear hint that Beijing will do more to protect China’s economy, Xi insisted that his government was standing behind its business leaders.

In a letter to private entrepreneurs, the Communist leader pledged:

“Any words and practices that negate and weaken the private economy are wrong.

Supporting the development of private enterprises is the Party Central Committee’s consistent policy.

Other Chinese officials have also been making supportive noises.

On Saturday, vice premier Liu He held a meeting with top officials to discuss financial stability in the face of the trade war with America. He later said that China must move faster to implement measures to encourage the healthy development of the economy.

These comments are seen as evidence that China could ease fiscal policy and cut taxes to support its economy, after seeing growth slow to its lowest rate in 10 years last week.

Chinese investors have leapt into action, driving the blue chip CSI300 index up by over 4.3% in late trading. The Shanghai Composite index is up 4%, on track for its best day since March 2016.

Other Asia-Pacific markets are also rallying, on hopes that a big Chinese stimulus package would support growth in the region.

Jasper Lawler of London Capital Group says:

Asian shares bounced higher on Monday, as Chinese stocks extended their rebound for a second straight session, pulling European futures higher in the process.

Beijing’s pledge of support for the economy is overshadowing geopolitical concerns over Saudi Arabia, Italy and Brexit.

Also coming up today

Italian stocks may be under pressure, after ratings agency Moody’s downgraded Italy’s credit rating on Friday night. On the upside, Moody’s left Italy with a ‘stable’ rating, meaning another downgrade isn’t imminent.

The move came as Rome prepares to see its 2019 Budget rejected by the European Union for breaching borrowing targets.

There’s not much in the economic calendar, but budget airline Ryanair and diamond producer Petra Diamonds are reporting results.

Updated

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