European markets attempt recovery
After Tuesday’s sharp falls in the wake of the Italian political crisis, most European markets tried their best to regain some of the lost ground.
Italy’s FTSE MIB is currently up 1.7%, Germany’s Dax is 0.7% higher, Spain’s Ibex has added 0.4% and the FTSE 100 is up 0.14%. But France’s Cac remains in negative territory, down 0.27%. On Wall Street, the Dow Jones Industrial Average is up 170 points or 0.7%.
The euro managed to gain 0.9% to $1.1641, recovering all of Tuesday’s losses, before slipping back to $1.1625.
The recovery came despite continuing confusion about the outlook for Italy, with reports suggesting that the 5 Star and Lega parties were attempting to revive their coalition plans. But there is still the prospect of further elections later this year to add to the uncertainty.
And the European Central Bank may call an urgent meeting to discuss the situation in Italy, according to sources.
Meanwhile an Italian bond auction succeeded, but at the cost of the highest interest rate since May 2014.
Over in Spain, prime minister Rajoy was resisting calls for him to step down, as he prepares to face a no confidence vote on Friday.
On the economic front, German inflation came in stronger than expected, adding to the problems facing the European Central Bank. Eurozone economic sentiment slipped slightly in May.
In the US there were disappointing jobs and economic growth figures.
On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.
Wall Street opens higher
The European recovery may in some cases be a little tentative, but the Wall Street rally looks a little more substantial.
The Dow Jones Industrial Average is up 160 points or 0.66% in early trading, while the S&P 500 has opened up 0.47% and the Nasdaq Composite is 0.43% higher.
Updated
US economy grows less than forecast
Another piece of US data to keep away from the president.
US GDP grew by less than initially thought in the first quarter. On an annualised basis the economy grew by 2.2%, down from the first estimate of 2.3% and much lower than the fourth quarter’s growth rate of 2.9%.
But economists expect that Trump’s $1.5bn of tax cuts could boost growth in the second quarter, closer to the president’s 3% target.
Updated
US employment below expectations
Don’t tell Donald Trump, but the latest US private payroll figures have fallen short of forecasts.
Ahead of Friday’s non-farm payrolls, the ADP employment report shows an increase of 178,000 private sector jobs in May, compared to expectations of a 190,000 rise.
On top of that, the April number was revised down from 204,000 to 163,000.
The surge in German inflation complicates the European Central Bank’s life even further, says ING Bank economist Carsten Brzeski:
While the Easter Bunny Effect has finally been left behind, German inflation is still heavily affected by seasonal effects. The sharp surge in oil prices in combination with several public holidays and long weekends pushed up energy prices, leisure costs and food prices. Under the surface of (too) many one-off factors, German inflation data still tells a two-sided story: while prices for consumer goods have gradually accelerated in recent months, inflation on services has slowed down and has even been negative for a couple of months for communication and clothing. Where available, core inflation measures at the state levels actually dropped in May.
Despite today’s increase in headline inflation, the underlying trend still points to a rather benign picture for inflationary pressure. For the ECB, however, today’s inflation data from Germany gives a foretaste of the increased complications on the road to taper. The still undecided debate on whether the Eurozone economy is in a soft patch or at the start of a protracted downswing, the surge in oil prices and latest political developments in Italy have clearly complicated the ECB’s life. It increasingly looks as if the big question for the ECB is not when to stop QE but rather when to signal an extension of QE. With latest market turmoil and political tensions in Italy, giving some certainty in times of uncertainty could be the ECB’s preferred policy choice. This would be an announcement or at least a very clear hint at QE extension at the June meeting.
German inflation jumps to higher than expected 2.2%
The cost of buying goods and services in Germany has soared above the European Central Banks target of 2%, according to official figures.
Consumer price inflation jumped from 1.4% year on year in April to 2.2% in May, the fastest pace since February 2017 and well above forecasts of a 1.8% rise. The month on month increase was 0.6%, compared to expectations of a figure of 0.3%.
The biggest rises were in energy and food prices.
The figures strengthens the hand of the Bundesbank, which would prefer the ECB to end its QE programme this year and begin raising interest rates, partly to benefit German savers.
Here’s our latest report on the day’s political developments in Italy:
The head of Italy’s anti-establishment Five Star Movement has rekindled negotiations to form a government, days after a bitter row over the country’s future in the eurozone ended a fledgling deal for populist parties to take power.
Luigi Di Maio, the 31-year-old head of the M5S, Italy’s largest party, indicated on Wednesday he was prepared to compromise on his controversial choice of a eurosceptic economist, Paolo Savona, for finance minister. But he insisted that his pick for prime minister remained political newcomer Giuseppe Conte.
In the absence of an agreement between Di Maio , the president of Italy, Sergio Mattarella, and the far right leader Matteo Salvini, Di Maio said he favoured snap elections.
“There are two paths ahead. Either we launch the Conte government with a reasonable solution or we vote right away,” he said.
Italian markets, which have been hit hard by the political crisis, rallied on the news of a potential new deal, which would at least temporarily put plans for a new election on hold.
The full story is here:
Despite many markets edging higher, they are nowhere near recovering the Italy-driven losses, and investors have very little appetite for risk at the moment. Craig Erlam, senior market analyst at Oanda, said:
It looked as though we were headed for fresh elections as early as July, with negotiations between Five Star Movement and Lega having failed after President Sergio Mattarella vetoed their choice of Finance Minister. Carlo Cottarelli – a former IMF economist - was tasked with forming a temporary government until further elections are called, ideally next year, but that appears to have failed before it got started.
While early elections will arguably be very beneficial to the populist parties, who will cite the rejection of its choice of Finance Minister as evidence of Brussels interference and an abuse of the democratic will of the people, it seems one last attempt to form a government is being discussed. The parties seem unwilling to hold an election in July and have no desire to wait until next year.
If a government can be formed that receives the stamp of approval from Mattarella and is therefore seen as not posing a threat to Italy’s place in the eurozone, then this will come as a relief to markets in the near-term. Longer-term risks remain though and both parties will likely use recent events as a platform to drum up opposition to the euro with the end goal of holding its own referendum, something eurozone leaders will understandably fear after the UK result in 2016.
Stock markets keep a mixed feel towards midday: FTSE mildly higher (#GBP just mildly higher helps explain why) #STOXX +0.07%, #DAX +0.5%, France's CAC40 dn 0.2%, #Italy's FTSEMIB +1.5% - biggest index riser - Swiss #SMI dn 0.3%, US stock index futures each up 0.5% 1/ ^KO
— Ken Odeluga (@Ken_CityIndex) May 30, 2018
Over in Spain, prime minister Rajoy is resisting the idea of stepping down as he prepares to face Friday’s no confidence vote:
Spanish Prime Minister Mariano Rajoy rules out quitting ahead of a no-confidence vote in parliament over graft convictions against members of his Popular Party
— AFP news agency (@AFP) May 30, 2018
https://t.co/3NCKAjNVjh pic.twitter.com/iBJYCQF9Xb
Everyone needs to take a deep breath and calm down. Only then can we talk about Italy. 1) Bond market moves do not break up monetary unions. Bank runs do. There is no evidence of bank runs. 2) Neither Italian parties nor Italian voters support leaving the Euro. 3) The anti-party coalition was not expected to last, because of policy disagreements. It is not certain that the two anti-parties would try to form a government after elections. Markets have moved anyway. We are now in that phase where any trader who overheard a conversation in their local Domino’s Pizza takeaway considers themselves an expert on Italian politics. Investors would be wise to treat recent market moves with caution.
The Lega party reportedly wants new elections in Italy as soon as possible. Reuters says:
Italy’s far-right League party will not block rapid political solutions that would allow the country to handle possible emergencies, but it wants an election as soon as possible, a source from the party said on Wednesday.
“At this point, we will not block rapid solutions capable of managing emergencies, but we must let Italians express themselves again as soon as possible,” the source said.
The source did not explain what was meant by “emergencies”, though financial markets have been in turmoil over the continuing political uncertainty.
Europe is likely to muddle through the current political uncertainty, says Erin Browne, head of asset allocation at UBS Asset Management:
Without a swift political solution to the situation in Italy, we believe that the risk-return trade-off for European assets has deteriorated. As things currently stand, we are likely to see a period of heightened volatility in Italian and broader European equities and bonds amid Italian political dynamics and their interactions with ECB policy.
That said, we do not see Italian political developments as presenting material systemic risks beyond Europe at this stage. Both populist parties have signalled they will not attempt to leave the Eurozone (and according to the Italian Constitution this would be extremely difficult in any case), even if their desired fiscal policies put them on a collision course with the core of Europe and the ECB.
We ultimately expect market and political pressures to constrain these parties, and Europe will find a way to muddle through political uncertainty as it has in the past. Still, we recognize the path to resolution is likely to be bumpy and have downgraded our outlook on European assets to account for recent developments.
Ok-ish BTP auctions, with stronger 5yr and weaker 10yr (on the latter the size was cut from 2.25 bln max to 1.82 mio).
— Gustavo Baratta 🇪🇺🇮🇹 (@gusbaratta) May 30, 2018
Lots of speculative bids well below market in all bonds.
The cost of a crisis:
— Ferdinando Giugliano (@FerdiGiugliano) May 30, 2018
Italy will pay an average yield of 3% on 10-year bonds auctioned today. It was 1.7% last time.
Rome will also pay an average yield of 2.32% on 5-year bonds, up from 0.56%.
Updated
The Italian bond auction results are in, and it seems to have been a reasonable success although the interest rate is again a high one:
*ITALY SELLS 10-YR DEBT AT 3%; HIGHEST SINCE MAY 2014
— Michael Hewson 🇬🇧 (@mhewson_CMC) May 30, 2018
*ITALY DEMAND AT 10-YEAR BOND AUCTION STRONGEST SINCE DECEMBER
— Michael Hewson 🇬🇧 (@mhewson_CMC) May 30, 2018
Italian bond auction results show good support. Italian banks have every reason to buy - lack of demand would hurt the value of their existing inventory. Like art collectors bidding for new work from artists they already own.
— Simon Jack (@BBCSimonJack) May 30, 2018
Updated
The dip in the eurozone sentiment figures shows that even before the Italian turmoil, confidence was not really recovering, says Bert Colijn, senior eurozone economist at ING Bank:
Much like fidget spinners, euphoria about Eurozone growth and politics is definitely something that stayed in 2017. A few months ago, the sky was the limit for Eurozone sentiment, but now even stabilisation seems like a good result, as analysts expected worse.
Given that the survey does not account for the Italian turmoil, it’s safe to say that moderating growth continues to be the message of 2018. While a few one-offs impacted the disappointing first quarter growth rate of 0.4%, it seems that there is some more permanence to the slower growth than initially expected even though Eurozone fundamentals remain strong with labour market strength and a favourable investment environment.
The months ahead will likely see uncertainty continue as the Italian political crisis could drag on during the summer. As developments towards a new government continue, uncertainty about the Italian stance towards the EU and the euro will prevail. Even though it is very unclear what the next steps will be, markets have clearly woken up from the euro-risk lull that started after the Macron presidential election victory in France last year. This continued uncertainty will weigh on Eurozone growth in the months ahead, and a bounce back to growth rates seen in 2017 seems very difficult.
Photograph: Chesnot/Getty Images
Eurozone economic sentiment slips
Economic confidence in the eurozone dipped slightly in May, according the European Commission.
The economic sentiment index slipped by 0.2 points to 112.5 in the eurozone, but edged up 0.4 points to 112.8 in the wider EU. Consumer confidence in the eurozone was down from 0.3 to 0.2. The commission said:
Virtually unchanged consumer confidence (-0.1) was the result of a marked decrease in consumers’ assessment of the future general economic situation, which was counterbalanced by a strong increase in their savings expectations. Views on households’ future financial situation and unemployment remained broadly stable.
Meanwhile in Spain, ahead of the no confidence vote facing prime minister Mariano Rajoy:
Spanish opposition plan to topple PM Rajoy is seen gaining momentum $EUR
— DailyFX Team Live (@DailyFXTeam) May 30, 2018
Updated
ECB "may call urgent meeting to discuss Italy"
The European Central Bank may call an emergency meeting to discuss Italy sometime this week.
“Mario Draghi is obviously following events very closely and will likely call an urgent meeting imminently,” said a source close to a member of the European Central Bank’s governing council.
On Tuesday Bank of Italy governor Ignazio Visco warned that the crisis-stricken country is at “very serious risk of losing the irreplaceable asset of trust.”
Economic growth still depends on cheap borrowing - OECD
Here’s the OECD’s latest economic outlook:
Unemployment will drop to its lowest level since 1980 across the world’s richest nations, but global growth remains dependent on cheap borrowing and government spending, the Organisation for Economic Cooperation & Development (OECD) has warned in its latest global economy health check.
The rise of tit-for-tat protectionist trade barriers, the return of volatile financial markets, and soaring oil prices also spell trouble for the global economy as it heads towards the 10-year anniversary of the 2008 banking collapse, the OECD said.
“The economic expansion is set to continue for the coming two years, and the short-term growth outlook is more favourable than it has been for many years,” said Angel Gurría, secretary general of the OECD, the Paris based thinktank for the world’s 35 richest nations, including the US, Britain, Brazil, Mexico and Russia.
“However, the current recovery is still being supported by very accommodative monetary policy, and increasingly by fiscal easing. This suggests that strong, self-sustaining growth has not yet been attained.”
The full story is here:
Updated
More reports from Italy on its political future, suggesting a new coalition may not happen:
*LEAGUE SALVINI DOES NOT SEE CHANCES TO FORM COALITION GOVT NOW
— Arne Petimezas (@APetimezas) May 30, 2018
Looks that option of Five Star and League making fresh attempt to form government and convice Mattarella is no longer possible https://t.co/DBGi0x6BCW
— Danilo Masoni (@damasoni) May 30, 2018
Updated
Germany unemployment rate at record low since reunification
Away from Italy for the moment, and some good news on the jobs front from Germany.
The jobless total fell by a better than expected 11,000 in May to 2.358m. Analysts had been forecasting a drop of 10,000.
The unemployment rate fell to 5.2%, down from 5.3% and the lowest since the reunification of West and East Germany in 1990.
Head of the Federal Labour Office Detlef Scheele said: “The upward trend on the labour market is continuing, albeit at a slower pace than in the winter months.”
As for the euro, it has made a slight recovery along with the Italian stock market, up around 0.5% at $1.1603.
Italian turmoil rattles nerves in Greece
Senior finance officials in Greece are watching events in Italy increasingly nervously, reports Helena Smith in Athens.
Exiled from capital markets for the best part of the last decade, the debt-stricken country is aiming to return to them once its third - and last - EU-IMF funded rescue programme officially expires in August.
“What is happening in Italy worries us immensely,” a senior banking source told the Guardian. “The bond markets have gone mad in southern Europe. With such yields it is totally prohibitive that Greece could return to them when the programme ends.”
Any prospect of Athens making a ‘ clean break’ and assuming post-bailout ‘normality’ without outside assistance has also been quashed by the Italian turmoil, well-placed officials say. The Governor of the Bank of Greece Yiannis Stournaras has long argued that Greece will need a precautionary credit line “as a protective cushion” to see it through as it endeavours to stand on its feet after its worst financial crisis in modern times.
Athens’ leftist-led government, keen to break free of international oversight, has dispelled any such notion. But another senior official said: “The country will need some sort of fall-back, even if to never uses it. The government’s narrative of clean breaks, and going it alone, is over for now.”
Connor Campbell, financial analyst at Spreadex, said:
Despite an eye-watering drop in the Asian session, prompted by duel macro-downers of a new set of US tariffs on Chinese goods and the whiff of eurosceptic Greek tragedy around Italy’s political pile-up, the European indices avoided anything too ugly after the bell.... The DAX is up 0.2%, and is trying its best to re-cross 12700 having briefly fallen below 12600 – a one month low – on Tuesday, with the CAC flat at 5390. Italy’s FTSE MIB was actually the most upbeat... as investors cling onto hopes that this whole situation can avoid the kind of prolonged, and costly, crisis that engulfed Greece a few years ago.
As for the FTSE, it showed no signs of bouncing back this Wednesday. Dipping 0.1%, the UK index is just about holding above 7600, and is back at levels not seen since for 3 weeks. With little else on its agenda, the FTSE will be hoping that things don’t take another downturn in the Eurozone (or, indeed, the US).
The report that 5 Star and the Lega party are attempting to revive their coalition seems to be one of the reasons behind a slight recovery in the Italian market. The FTSE MIB is currently up 0.77% but could go higher:
If Five Star and Lega will form a government, Italian stock market will soar.
— Morris Cabrioli (@insidegame) May 30, 2018
Italy is issuing new bonds this morning, which will give another indication as to how investors feel about the current situation. On Tuesday it succeeded with a smaller issue, but at much higher interest rates.
11:00 CET: Italy taps from €3.750bln to €6 bln of medium-long term bonds.
— Gustavo Baratta 🇪🇺🇮🇹 (@gusbaratta) May 30, 2018
Results expected around 11:15-11:20 CET. pic.twitter.com/6i5Imo0u0M
Mixed start in Europe
As investors await the latest political developments in Italy, European markets seem to have shrugged off the heavy falls on Wall Street and in Asia.
Italy’s FTSE MIB is up around 1.3% in early trading, with the country’s banking index around 2% better.
Spain’s Ibex is up 0.4%, Germany’s Dax is 0.2% better but France’s Cac is down 0.3%.
Meanwhile the FTSE 100 has dipped 0.1% or 8 points.
That is not to say the situation in Italy is any less confusing:
Amid much confusion, it should become clear today whether Cottarelli will form a government or return the mandate to the Pres.
— wolf piccoli (@wolfpiccoli) May 30, 2018
On the other hand:
*LEAGUE'S SALVINI, GIORGETTI SEEN AS POSSIBLE PM: REPUBBLICA
— Arne Petimezas (@APetimezas) May 30, 2018
And the controversial finance minister appointee - vetoed by the Italian president - may also be back in the frame:
*ITALY'S LEAGUE TO ASK AGAIN FOR SAVONA IN GOVT W/ 5 STAR: SIRI
— Arne Petimezas (@APetimezas) May 30, 2018
Italian bonds, which suffered heavy selling on Tuesday, appear to have recovered slightly.
The yield - which moves inversely to the actual bond price - on two year bills has dipped 33 basis points to 2.095% having hit five year highs. The ten year yield is down 12 basis points at 2.98%.
Agenda: Investors remain nervous after Italian political turmoil
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Fears over the political chaos in Italy spread to the US and Asia overnight, and European markets are expected to open lower as a consequence.
After the collapse of the coalition in Italy as the president vetoed its choice of finance minister, former IMF man Carlos Catterelli was put in as interim prime minister. But his failure to come up with a list of ministers reinforced the prospect of new elections before long. The prospect of the anti-EU parties winning more of the popular vote was one of the main factors spooking the markets, with the idea of Italexit gaining ground.
But reports that the two mooted coalition partners, 5 Star and the Lega party, could make a new attempt to form a government could provide some relief to the markets, if such a move is seen as credible.
Even so, European investors remain nervous, not least because Wall Street tumbled 1.58% on Tuesday and the Nikkei 225 is currently down a similar amount.
Here’s our story on the fall in Asian markets:
Banking shares were among the biggest fallers on Tuesday, as Jasper Lawler, head of research at London Capital Group, explains:
Big banks dropped the hardest, struck by a double whammy of investors trying to suss out which lenders are capable of surviving a fresh eurozone storm; in addition to being hit by lower US bond yields as investors brought into safe haven treasuries. A lower yield environment is considered less profitable for the banks, a sector which dived as the US 10-year bond enjoyed its biggest rally since the Brexit referendum in 2016, sending yields 15 basis points lower to 2.78. The latest action has put the recent 4 year high of 3.08% 10yr yields into the history books, at least for the time being.
The S&P closed 1.2% lower whilst the financial sector shed 3.4%, as the likes of Citibank, JP Morgan, Bank of America and Morgan Stanley closed 4% lower.
There are other causes for concern for investors, not least the no-confidence vote facing the Spanish government on Friday.
And of course, in such a febrile environment, it is no surprise that President Trump has waded in and ratcheted up the trade row between the US and China. Michael Hewson, chief market analyst at CMC Markets UK, said:
[Markets face] the prospect of elevated trade tensions after President Trump announced that the US would be proceeding with $50bn worth of tariffs on Chinese in imports. With EU exemptions on US tariffs also due to expire this Friday, markets are likely to find it difficult to catch a break today.
Here are the opening calls for Europe from IG:
European Opening Calls:#FTSE 7615 -0.23%#DAX 12644 -0.18%#CAC 5393 -0.82%#MIB 21140 -0.99%#IBEX 9478 -0.45%
— IGSquawk (@IGSquawk) May 30, 2018
There are also some economic figures to keep an eye on, as well as what could be a lively annual meeting of the Royal Bank of Scotland. The bank has already announced that finance director Ewen Stevenson is stepping down from his role to take up an opportunity elsewhere.
Agenda:
8.55 BST German unemployment
9.30 BST OECD global economic outlook
10.00 BST Eurozone business and consumer confidence
13.00 BST German consumer price index
13.30 BST US first quarter GDP
Updated
