28 September 2018

@iaingibson

28 September 2018

Good morning,

As we approach the winter months, most of us would probably rather up sticks and head to Italy’s more moderate climes, but even there it seems you won’t be able to escape budget shenanigans and uncertainty over the country’s relationship with the EU moving forward.

Earlier this year, the centre-right Lega Nord and the very anti-establishment (see ‘populist’) Five Star Movement formed a government – Italy’s 66th in the 73 years since World War II ended –  that is markedly more hostile to its European partners than the Matteo Renzi-led administration which preceded it. And it looked like the country’s budget announcement was an ideal opportunity to pick a fight.

This state of affairs had led to rumours, which in turn led to extreme investor concern, that the coalition government would this week announce spending plans that would not be acceptable to the EU. It didn’t help that the government was very publicly divided on this issue (sound familiar?), with the leaders of the two parties pushing for a sharp increase in public spending and the economy minister – who is only in post because he was forced upon the government when the Italian President rejected its first pick – had spoken of moving in the other direction.

Finally, after a shambolic announcement process, the numbers are in and the economy minister has blinked first. Italy last night confirmed it will aim for a budget deficit of 2.4% of GDP in 2019, far higher than the 1.6% target for this year, agreed by the last administration, and three times more than initial projections. Needless to say, the news has initially gone down very well with a general public who are impressed, perhaps almost surprised, that the populist government is following through on its election promises. The markets were less pleased, with the eventually-confirmed rumours negatively impacting Italian equities all through this week. The exact impact on the European sovereign debt market remains to be seen, but the fact that Italian bonds rallied when it looked as if the economy minister was set to win the argument probably tells its own story.

So, there is no question the EU will look to respond sharply. At a time when it is presenting a fairly united front in administering a kicking to the UK over the terms of Brexit, it could do without this very public act of defiance from one of its largest member economies. And if you were a Brexiteer you might be heartened by this evidence that not all governments on the continent are fully subscribing to the EU rulebook. Ultimately though, the long-term fallout from this row will only kick in after March 2019, so it doesn’t really matter. What does matter is the global political angle, with Italy’s leaders tapping into the same discontent that has propelled populism to power in democratic countries around the world. Strap in, because it is going to be quite a ride.

News

The US Securities and Exchange Commission has accused Tesla CEO Elon Musk of fraud and announced it is seeking to remove him from his role in charge of the company. The move is in relation to what SEC describes as Musk’s “false and misleading” tweets about looking to take Tesla private last month.

Germany has beaten Turkey in the race to host Euro 2024. The decision was made after a vote by UEFA’s executive committee in Switzerland yesterday, which had followed final presentations from the two bidders. This is the first time post-unification that the country will host the Euros, having staged the World Cup in 2006. Turkey's lack of an action plan in the area of human rights and limited hotel capacity in many cities were cited by UEFA as matters of concern when making the decision.

The Senate Judiciary Committee in the US saw some of its most dramatic testimony ever, as the row over the potential appointment of Brett Kavanaugh to the US Supreme Court continued. Christine Blasey Ford, who has accused Mr. Kavanaugh of assault, gave a powerful testimony in front of senators, in which she repeated and elaborated on her accusations. She was followed by Brett Kavanaugh, who gave an emotional account of himself, describing the events as a "grotesque and co-ordinated character assassination". 

Business & Economy

The UK Competition and Markets Authority is investigating a complaint from charity Citizens Advice that consumers are being penalized to the tune of £4bn per year for staying loyal to their current providers. CA has issued a “super complaint” to the CMA about a so-called loyalty penalty across five markets – mobile, broadband, home insurance, mortgages and savings – which amounts to £900 per customer per year.

New figures from Thomson Reuters have shown that global mergers and acquisitions dropped 35% between Q2 and Q3 2018, to $783bn. The number of global announced deals hit its lowest level since 2013, at about 9,135, and global deal volume was down 6% on the same quarter last year. However, the first nine months of 2018 saw global dealmaking reach a new record of $3.2trn. The escalating trade dispute between the US and China has been cited as a key driver of these poor quarterly numbers. 

Brazilian petroleum company Petrobras has agreed to pay an $853m settlement with authorities in the US and Brazil, effectively ending the large-scale corruption investigation against it. The investigation began in 2014 when Brazilian prosecutors first announced their investigation into a cartel of construction companies that had been overbilling Petrobras and bribing high-level Brazilian politicians and Petrobras executives along the way. Petrobras will pay $682m into a Brazilian fund that promotes corporate transparency and an additional $171m to the US Justice Department and Securities and Exchange Commission.

Markets

What happened yesterday?

In the US, stocks rebounded following the Federal Reserve’s message of continued gradual interest rate increases, with the S&P 500 rising 0.3% on the day, the Dow Jones Industrial Average up 0.2% and the Nasdaq Composite up 0.7%. The benchmark 10-year Treasury yield stood at 3.05 per cent.

In Europe, the drama in Italy (described above) ensured that Italian bonds remained volatile, having initially climbed when it was believed lower spending plans would be announced. The rise in yields steadied off when the plans became clear, but Italy still sold €5.25bn of bonds in an oversubscribed sale. 

The FTSE had a mixed day, with the FTSE 100 up 0.5% higher but the FTSE 250 down 0.3%.

Interims
GAN
Nostra Terra Oil & Gas Company
Premier African Minerals Ltd
Richoux Group
 
Trading Announcements
easyJet
 
AGMs
Associated British Engineering
Clipper Logistics
Dish TV India Ltd
Fragrant Prosperity Holdings Ltd
Lucky Cement Ltd
San Leon Energy
Trafalgar Property Group

UK Economic Announcements
(00:01) GFK Consumer Confidence
(09:30) Current Account
(09:30) GDP (Preliminary)
 
International Economic Announcements
(07:00) Import Price Index (GER)
(08:55) Unemployment Rate (GER)
(13:30) Personal Consumption Expenditures (US)
(13:30) Personal Income (US)
(13:30) Personal Spending (US)
(14:45) Chicago PMI (US)
(15:00) University of Michigan Confidence (US)

Columns of Note

Writing in The Financial Times, Philip Stephens steps up his argument that Britain is in no way ready to leave the EU and the process should be delayed. He is critical of both main political parties – the Conservatives for deluding themselves as to the UK’s position of strength and also what the EU was prepared to offer, and Labour for affecting “a Brexit policy soaked in cynicism”. He asks for the Article 50 negotiations to be stopped and for more time to be taken in negotiating the options.

In The Guardian, Timothy Garton Ash laments that, whilst we consider the many failings of Donald Trump as the key reason, we now cannot overlook the fact that the transatlantic alliance between the US and the UK is at its lowest ebb for 70 years. He believes that because the US now views China as its main threat, Britain is less useful than when the main problems stemmed from Russia. Also, Americans generally are just less interested in the world around them and, to that degree, he views Trump as a symptom and not a cause of the current predicament.

Did you know?

Since its formation in 1932, Saudi Arabia has had seven kings. As far as can be counted, these seven kings have fathered approximately 302 legitimate children, by around 118 wives. There are believed to be more than 5,000 living descendants of the first king, who only died in 1953.

Parliamentary highlights

TODAY

House of Commons

In recess until Tuesday 9 October

House of Lords

In recess until Tuesday 9 October

Scottish Parliament

No business scheduled