The clash over Italy’s new budget plans have sparked memories of the Greek debt crisis.
Withe relations between Rome and Brussels deteriorating, some investors are wondering if we could see a repeat of the drama of 2015, with another populist government promising to challenge the eurozone status quo.
But others think not - pointing out that Italy doesn’t have the same borrowing needs, or any sign of being locked out of the borrowing markets.
Another factor - Italy’s two trillion euro debt is simply too large for Brussels to risk a default.
Mohamed A. El-Erian, the chief economic adviser at German investment giant Allianz, says:
What ultimately saved Greece’s membership in the euro zone a few years ago was the imminent threat of default. Fearing a shock that would tip the economy into a multiyear depression and fundamentally alter many of Greece’s regional economic and financial relationships, the Syriza government opted for an orthodox approach, even though it had won both the election and the referendum by backing a political agenda that advocated doing the opposite.
The hope of many investors — as well as EU officials, ECB officials and several policy makers in European capitals — is that the Italian government will perform a similar pivot, even though the immediate default risk is lower. In doing so, Rome would need to design a more comprehensive program aimed at generating high, inclusive and sustainable growth.
Wall Street remains on track for yet another record close tonight.
Fiona Cincotta of City Index attributes the rally, in part, to optimism over Italy.
She writes:
Some traders have been looking past the Brexit and tariff issues which have dominated headlines recently and have seen the iceberg that is the Italian debt situation looming ahead.
Fears also seem to be subsiding on news that the Italian government has said it would cut its debt and not go on the spending binge it had previously indicated. Sources close to an Italian cabinet meeting told Corriere dell Sera that the government would bow to EU pressure to reduce its budget deficit to 2% of GDP by 2021. This was enough to convince UBS, which stated that it was going to be overweight in two year Italian bonds and that the market now looked cheap for short-dated Italian debt. The bank is still prudently cautious on longer term Italian bonds but fears over a short term default seem to be ebbing.
There will be some relief on trading desks in London and New York this afternoon, but if there is anything that is certain, it is the uncertainty of Italian politics. The country could still be downgraded, and it is being run by a coalition that has more than enough scope to fall apart. Yields on the two year Italian government bond jumped more than 60 basis points in two weeks to around 1.49% on Tuesday, but that should come down somewhat in days to come, barring further fractures in the Italian coalition.
Back in the markets, the conciliatory noises from Rome helped shares to close higher in Milan, and beyond.
The FTSE MIB index ended the day up 0.85%.
Britian’s FTSE 100 and the French CAC both finished nearly 0.5% higher, as fears of another eurozone crisis receded (for the moment, anyway).
The IMF has also warned that governments haven’t done enough to protect themselves from the next downturn.
It says:
“risks tend to rise during good times, such as the current period of low interest rates and subdued volatility, and those risks can always migrate to new areas.”
More here:
IMF: Financial crisis lingers on
Newsflash: The International Monetary Fund has warned that the world is still suffering from the 2008 financial crisis.
In its latest World Economic Outlook, the IMF warns that the crisis may have had lasting effects on potential growth and inequality, as well as slashing output and hurting productivity.
It says:
For example, fertility rates have been on a steeper decline in many economies—a development that will drag on the size of the labor force in the future in those countries.
Another effect is that net migration (immigration minus emigration) rates among advanced economies declined after the crisis.
The Fund also points out that some countries fared better than others:
Those in better fiscal shape, with better regulated and supervised banks, and flexible exchange rates generally suffered less damage.
Output losses after the financial crisis are persistent in many countries and not restricted to those that suffered a banking crisis in 2007-08 #WEO https://t.co/KQLhdmFvNN pic.twitter.com/c3DdmKsZIH
— IMF (@IMFNews) October 3, 2018
Updated
Developments in Italy....
*ITALY BUDGET OUTLINE READY, TO BE SUBMITTED AFTER 5PM: OFFICIAL
— lemasabachthani (@lemasabachthani) October 3, 2018
Putin blames Trump for high oil prices
The oil price is hovering close to a four-year high today, at $84.55 per barrel.
That’s bad news for energy consumers, and drivers.
US president Donald Trump has blamed Opec, urging the cartel to boost production. But his Russian counterpart, Valdimir Putin, says Trump must take responsibility.
Russian President Vladimir Putin said his American counterpart’s Iran sanctions are largely to blame for current high oil prices.
“President Trump considers that the price is high; he’s partly right, but let’s be honest,” Putin said at the Russian Energy Week conference in Moscow on Wednesday. “Donald, if you want to find the culprit for the rise in prices, you need to look in the mirror.”
“Donald, if you want to find the culprit for the rise in [oil] prices, you need to look in the mirror" -- Putin https://t.co/gbe7bpGFqF
— Tina Davis (@tina_davis) October 3, 2018
Dow hits another record high
The US stock market has opened higher, amid optimism that the Italian budget row might be resolved.
This has driven the Dow Jones industrial average up to a new all-time high, gaining 135 points or 0.5% to 26,909.
BREAKING: Dow Jones Industrial Average opens at new all-time high https://t.co/hYesfgqjPc pic.twitter.com/RYWgbFVnk5
— CNBC Now (@CNBCnow) October 3, 2018
Investors are welcoming economy minister Tria’s pledge that the Italian government will seek to reduce the deficit over the next few years, says Craig Erlam of City firm OANDA.
He adds:
In the near-term, concerns about Italy are primarily related to spending and the impact on its already bloated debts but in the longer-term, they also reflect the very real risk that the public could become more eurosceptic and talk of referendums could follow.
For now, this is likely to be some time away and the fragility of the Italian banking sector and still large holdings of Italian bonds make investors very nervous.
Over in Paris, European Commissioner Pierre Moscovici has welcomed the news that Italy appears to be revising its borrowing plans.
He told Reuters that:
“It’s a good signal that the trajectory has been revised because it shows that the Italian authorities are hearing the concerns and remarks from their partners and the European Commission.”
But, he also cautioned that Rome could still breach EU rules on structural deficits next year, if it borrows as much as 2.4% of GDP to balance its books.
Deputy Italian PM Matteo Salvani has also said that the government will publish its multi-year budget later today.
Italian bonds are continuing to rally, following economy minister Giovanni Tria’s pledge that its deficit will fall in 2020 and 2021 (after rising in 2019).
The yield on Italy’s 10-year debt has now dropped to just 3.3%, from over 3.4% when fears over Rome’s budget were raging yesterday.
However, that’s still close to a four-year high, reflecting concern over Italy’s fiscal plans.
Emanuele Canegrati of trading firm BP Prime fears that the government’s forecasts will prove too optimistic, meaning it struggle to hit borrowing targets.
#Salvini's goal of GDP growing +1,5% in 2019 is completely at odds with reality. #Confindustria predicts only +0.9%. This way Italian government believes that its 'tax and spend' programme could boost Italian growth. So bad financial markets do not believe it @graemewearden
— emanuele canegrati (@ECanegrati) October 3, 2018
Just in: Matteo Salvini, the head of the right-wing League party, has insisted that his government is sticking to its target of a 2.4% budget deficit next year.
No mention of 2020 or 2021, though.....
SALVINI SAYS ITALY GOVT WON'T BUDGE ON 2019 DEFICIT GOAL: ANSA
— FxMacro (@fxmacro) October 3, 2018
Salvani is also insisting that growth will pick up next year -- despite employers’ lobby group Confindustria slashing its forecasts today.
*SALVINI SAYS #ITALY GDP TO RISE AT LEAST 1.5% IN 2019: ANSA
— Diego Colman (@DColmanFX) October 3, 2018
*SALVINI SAYS ITALY GOVT WON'T BUDGE ON 2019 DEFICIT GOAL: ANSA
Italy’s stock market is still sharply higher today, on relief that Rome might be backing away from a major clash with Brussels.
The FTSE MIB is up 1.3%, led by banking stocks such as Unicredit (+1.4%), and Intesa Sanpaulo (+1.85%).
Here’s Associated Press’s take on Italy’s budget plans:
Italy’s economy minister is backing down on spending plans that would keep the country’s deficit at an elevated level for three years.
Giovanni Tria said Wednesday in Rome that the deficit to GDP ratio would be gradually reduced after 2019. The remark confirms a report by Corriere della Sera that the 2.4-percent budget deficit in the new spending plan would apply only to next year.
The government also released a statement late Tuesday saying that officials were working on a proposal that would “accelerate the decline in the debt-to-GDP relationship over the course of three years.”
The government’s apparent softening was providing relief to financial markets, where investors are concerned that the planned spike in Italian spending will harm efforts to reduce its debt pile.
Italy's economy minister confirms deficit plan has changed
Boom! Italy’s economy Minister Giovanni Tria has let the gatto out of the bag.
He’s confirmed that the Italian government now plans to cut the budget deficit in 2020 and 2021, after letting it rise in 2019 (probably to 2.4% of national output).
Speaking to a group of industrialist in Rome, Tria says:
“The deficit will increase compared with the previous forecast in 2019, but then there will be a gradual reduction in the following years.”
That suggests that, as predicted this morning, Rome’s government is moving away from aiming for a 2.4% deficit per year from 2019 to 2021 -- after pressure from the EU (and from the markets).
But that creates a problem. How can the coalition deliver on its pledges without borrowing more?
Ferdinando Giugliano of Bloomberg says there is very little room for manoeuvre:
I’ve just listened to Giovanni Tria but I am afraid I am no wiser. He has called for greater public investment, an income support scheme, lowering the pension age and cutting taxes. And, still, the govt will only have 3.4 billion euros to spend next year, by his own maths. 🧐 pic.twitter.com/sMVsPj9Aue
— Ferdinando Giugliano (@FerdiGiugliano) October 3, 2018
Italy’s populist government have good reason to consider breaching EU spending rules.
After many years of lacklustre growth, the Italian economy needs a boost. And with a massive national debt around €2 trillion, what damage does a little more borrowing do, especially if it delivers faster growth and more jobs - and eventually a bigger tax take - in future?
The danger, though, is that a fight with Brussels worries the markets, pushes up borrowing costs, and dampens investment.
Holger Schmieding of Berenberg Bank argues that the push to break EU budget rules could backfire:
Italy‘s fiscal plans and the behaviour of its key political leaders are probably self-defeating. Yes, Italy has underutilised resources. The economy may well respond for a while to a fiscal stimulus such as the one Italy‘s radical coalition is planning against the advice if its own finance minister.
However, picking a noisy fight with Italy’s European partners could stoke euro exit fears and depress economic sentiment by more than the fiscal stimulus could lift investment intentions and consumer spending.
On the other hand, the anti-establishment Five Star Movement and the right-wing Northern League won this year’s election with their promises to cut taxes, boost welfare spending and push back against EU rules. Being blocked by Brussels won’t dampen eurosceptic voices in Italy either....
Di Maio: 2019 deficit will be 2.4%....
Newsflash: Deputy Italian PM Luigi Di Maio has been speaking about the government’s budget plans.
According to Bloomberg, Di Maio has insisted that his government is sticking with its target of a deficit of 2.4% of GDP in 2019, despite pressure from the EU to bring it down.
But, Di Maio is also suggesting that borrowing could be lower in 2020 and 2021, as faster growth would mean the deficit would be a smaller proportion of the economy [that assumes growth picks up, of course].
Di Maio also says the government is committed to key policies, such as a basic income for citizens:
*ITALY DI MAIO: 2019 DEFICIT AT 2.4% CONFIRMED
— Michael Hewson 🇬🇧 (@mhewson_CMC) October 3, 2018
*ITALY DI MAIO SAYS GOVT MULLING CUTTING DEBT/GDP AFTER 2019
*ITALY DI MAIO SAYS GROWTH WILL ALLOW TO CREATE LESS DEFICIT
— Michael Hewson 🇬🇧 (@mhewson_CMC) October 3, 2018
*ITALY DI MAIO: FLAT TAX FOR SMALL ENTREPRENEURS VERY IMPORTANT
— Michael Hewson 🇬🇧 (@mhewson_CMC) October 3, 2018
*ITALY DI MAIO SAYS EU10B IS MINIMUM AMOUNT FOR CITIZEN INCOME
— Michael Hewson 🇬🇧 (@mhewson_CMC) October 3, 2018
UK service sector dragged back by Brexit angst
Just in: Britain’s service sector grew steadily last month, despite Brexit anxiety.
Data firm Markit reports that its services PMI index, which measures activity, dipped to 53.9 in September from 54.3 in August. Any reading over 50 shows growth.
Firms reported that new order growth eased off a little last month, amid ongoing political uncertainty.
Happily, they still kept hiring staff, with some firms pushing up salaries to attract employees. Unhappily, business confidence is still low, as Britain’s looming exit from the EU makes bosses fret about the future.
#UK September Services PMI falls to 53.9 vs 54.3 and below estimates - the pound is relatively unchanged though as #Brexit and the #ToryConference continues to dominate this week https://t.co/gPmadOx6Ao
— Bloomberg Radio (@BloombergRadio) October 3, 2018
Chris Williamson, chief business economist at IHS Markit, says the UK economy appears to be expanding at a reasonable rate, despite subdued business optimism.
“The service sector continued to report solid steady business growth in September which, alongside news of sustained expansions in both manufacturing and construction, suggests the UK economy expanded by just under 0.4% in the third quarter.
“The data therefore add to signs that the economy has enjoyed robust growth since the rocky start to the year, when extreme weather disrupted business.
“Brexit worries continue to dominate the outlook, however, keeping business optimism firmly anchored at levels which would normally be indicative of an imminent slowdown.
Updated
Thu LanNguyen, a FX strategist at Commerzbank, has warned that the market recovery may not last (via Reuters):
“That the Italian government is trying to appease its EU partners can be seen as a step in the right direction and therefore justifies some euro-positive reaction.
“The devil is in the details. The euro’s recovery will only continue if the new fiscal plans are also feasible.
Disappointing news from Italy -- employers’ lobby group Confindustria has cut its growth forecasts.
Confindustria now expects GDP to only rise by 0.9% in 2019, down from 1.1% previously. That’s rather less than the government’s official target of 1.6%.
Confindustria blamed America’s trade wars, and the turmoil in emerging markets such as Argentina and Italy.
If they’re right, then it will be harder for Rome to keep within its deficit targets.
Aston Martin floats...shares sink (a bit)
Back in the City, Aston Martin has made an underwhelming debut on the stock exchange.
The luxury carmaker floated its shares at £19 this morning, valuing it at £4.3bn. It was even invited to ring the opening bell in London, with a few swanky models parked outside the exchange too.
Paternoster Square painted Aston Martin. A proud day! pic.twitter.com/Ng78HkJpKt
— Andy Palmer (@AndyatAston) October 3, 2018
The company will have been hoping for the traditional ‘IPO pop’. But instead, shares soon made a screeching turn downwards, hitting just £17.75.
This means Aston Martin isn’t on track to burst into the FTSE 100, as had been rumoured.
At one stage, the company had hoped to float its shares at over £22. Neil Wilson of Markets.com suggests the City is taking a sober view of its prospects.
The strike price may be a disappointment for the owners – it’s a long way short of the £22.50 talked about previously as the top of the range. But this is a fairer valuation when you compare with peers – notably Ferrari – and therefore this price could offer an in for longer term investors that the higher valuation would not have afforded.
Italian bonds rebound
After days of losses, Italian government bonds are looking a little perkier too.
The yield (or interest rate) on Italy’s 10-year debt has dropped back to 3.33%, from a four-year high of 3.46% overnight.
That suggests investors see the debt as less risky.
Shorter-term Italian debt is also rallying, even though the Italian cabinet meeting hasnt’ actually happened yet, so nothing is agreed...
Good #Italy morning? Italian 2-year bond spread down ~25 basis points as government is said to reduce budget deficit targets for 2020 and 2021. pic.twitter.com/XCEKCQF6PN
— jeroen blokland (@jsblokland) October 3, 2018
#Italy #budget #BTP #EUR Local newswires report that the government will lower the budget deficit for 2020 to 2.2% and 2021 to 2.0%. If this is true it will lower the risk the EU will give a negative opinion on the budget. Expect BTPs to rally today and EUR/USD to bounce. pic.twitter.com/DdqkJ0jPg7
— Thomas Harr (@ThomasHarr4) October 3, 2018
Italian bank shares have jumped by 3% in Milan.
Traders are welcoming the news that the country’s government may be bowing to EU pressure, and trimming its planned budget deficit.
This has lifted the Italian FTSE MIB index by over 1% in early trading.
The euro has risen by 0.3% in early trading against the US dollar, to $1.158, having hit a six-week low on Tuesday.
Updated
Reuters is also reporting that Italy is planning to rein in its deficit plans, following pressure from the EC:
Italy’s government targets for the budget deficit to fall to 2.2% of gross domestic product in 2020 and to 2% in 2021 from an expected 2.4 percent next year, a government source from the right-wing League party said on Wednesday.
The 2020-2021 numbers were first reported by daily Corriere della Sera and La Repubblica.
Prime Minister Giuseppe Conte said late on Tuesday that Rome aimed to “accelerate the decline in the debt-GDP ratio in a consistent fashion over a three-year period”, without giving any numbers.
The coalition last week said it planned to run a deficit of 2.4% of GDP over the next three years, tripling the previous target, unnerving markets and prompting criticism from European Commission officials.
Conte is due to meet with key ministers to discuss the budget targets for 2019-2021 at around 1100 GMT on Wednesday,another government source added.
The agenda: Italian cabinet meeting over budget rules
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Is peace breaking out between Rome and Brussels in the budget row that has spooked the markets?
There are reports from Italy this morning that its populist government is giving some ground, in the dispute over its spending plans.
Italian PM Giuseppe Conte is holding a cabinet meeting with ministers later today to discuss the situation. According to Corriere della Sera, ministers are considering a new plan under which its budget deficit would drop to 2.2% of GDP in 2020, and 2% in 2021.
As Bloomberg puts it:
Italy’s government will bow to European Union pressure to reduce its budget deficit to 2 percent of gross domestic product in 2021, reversing plans to maintain a bigger shortfall for the next three years, Corriere della Sera reported, citing a Cabinet meeting
Previously, Rome had been gunning for a 2.4% deficit over the next three years, which would have breached Brussels’ fiscal rules and triggered an almighty row with the eurozone’s third-largest member.
Italy’s draft budget plan will pledge to cut the deficit to 2% in 2021, after the government reversed a proposal to maintain a 2.4% shortfall in the face of pressure from the EU, Corriere della Sera reported, citing a Cabinet meeting #comediadelarte
— Nicolas Forest (@nicolasforest) October 3, 2018
This (reported) climbdown comes after several days of market jitteriness, in which Italy’s government bonds have weakened. On Tuesday, Italy’s 10-year borrowing costs hit a four-year high.
There’s even been chatter about exiting the euro and returning to the lira (although as Greece discovered this is easier said than done).
Newsflow suggests Italy overnight talked about cutting the budget deficit in forward years 2020/21 to around 2%. Markets have been under pressure given the uncertainty around this - could see some risk-on. (Bloomberg)
— Gianclaudio Torlizzi (@TCommodity) October 3, 2018
Italy needs to send its draft budget plan to the European Commission by the middle of October.
Yesterday, deputy prime minister Luigi Di Maio insisted that the government wouldn’t yield “one millimetre” in the dispute, as it presses on with its spending plans, so today’s cabinet meeting could be lively.
We’ll be tracking events in Italy through the day....
Also coming up today
The International Monetary Fund releases details of its latest assessment of the world economy.
The latest Purchasing Managers Index reports are expected to show that UK and eurozone service sector firms grew steadily last month.
Michael Hewson of CMC Markets explains:
Having seen manufacturing beat expectations and construction slip back, the focus will be on today’s UK services number to round off Q3 and a decent economic performance for the quarter. Thus far for Q3 services activity came in at 54.3 for July and 53.5 in August. Today’s September number is expected to show a slight decline to 54, which would be pretty much in line with the average, and point to another fairly decent expansion.
It’s also services PMI day for Spain, Italy, France and Germany and here the numbers are slightly better than the manufacturing numbers we saw on Monday. For Spain and Italy expectations are for improvements to 52.9 and 52.8 respectively, while France and Germany numbers are expected to be confirmed at 54.3 and 56.5, the same as last week’s flash estimates.
Elsewhere, UK supermarket chain Tesco is reporting results, and sports car maker Aston Martin is floating on the London stock exchange
The agenda
- 9am BST: Eurozone service PMI for September
- 9.30am BST: UK services PMI for September
- 3pm BST: IMF publishes World Economic Outlook analytical chapters
Updated
