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

Graeme Wearden

from on 2018-10-22 17:32 (#41AGY)

Rolling coverage of the latest economic and financial news, as investors brace for Europe to reject Italy's budget this week

6.31pm BST

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.

6.26pm BST

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 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.

4.52pm BST

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.

4.26pm BST

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.

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 a17bn (15bn) to fund election campaign promises including tax cuts, a universal basic income and pension reforms.

3.32pm BST

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.

3.19pm BST

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.

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

3.12pm BST

The Wall Street rally is fizzling out too..

Stocks turn negative after opening higher https://t.co/Edsog1HaKf pic.twitter.com/sTyZdDyjDD

2.55pm BST

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....

2.36pm BST

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

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.

2.17pm BST

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.

2.04pm BST

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

Dow futures are up 82-points right now as the Dow snaps its three week losing streak last week.

1.44pm BST

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.

#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 https://t.co/iMv50jD8Si via @markets pic.twitter.com/tWSNSdlDJy

1.33pm BST

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.

BREAKING:

DUP will back amendment being tabled by Tory Eurosceptics on Wednesday that will effectively make the EU's NI backstop illegal

Yet another headache for No 10, with 40 Tory MP already poised to support it.

12.55pm BST

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.

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.

Italy's PM Giuseppe Conte now at the Foreign Press Association in Rome defending Italy's budget proposal. 'Read my lips: There will be no Italian Brexit (#Italexit), but Europeans are dissatisfied and we need to relaunch Europe.' #Italy @GiuseppeConteIT #EU https://t.co/oMAh9ggz9L

Italy premier #Conte: "read my lips: Italy won't leave the European Union". pic.twitter.com/xrAXlEc6W6

12.18pm BST

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...

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'.

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...

12.05pm BST

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...].

11.53am BST

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....

ITALY PM CONTE SAYS WE ARE READY TO CONSIDER REINING IN DEFICIT DURING THE YEAR

11.49am BST

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%].

ITALY PM CONTE SAYS REITERATES THAT ITALY IS IN EUROPE AND WANTS CONSTRUCTIVE DIALOGUE WITH EU

ITALY PM CONTE SAYS ITALY'S 2.4 PCT DEFICIT GOAL IS ONLY 0.4 PCT ABOVE THE TREND LEFT BY PREVIOUS GOVT

ITALY PM CONTE SAYS IF ITALY HAD CONTINUED ALONG FISCAL PATH SET BY PREVIOUS GOVT IT WOULD HAVE GONE INTO RECESSION

11.33am BST

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.

Societi(C) Generale 1/2: Theresa May remains under pressure in the UK after another awful weekend for newspaper headlines. A '#Brexit deal appears closer but whether she can sell the deal to her party is a completely different question. #GBP #sterling #pound #GBPUSD #EURGBP pic.twitter.com/WFnXl81jiS

11.25am BST

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

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.

10.48am BST

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.

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.

10.43am BST

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.

Italy Says To Publish Its Response To EU Letter On Budget At 1000GMT/1100BST $EURUSD

#Italy 10-yr government bond yield drops by most since June as Moody's downgrades credit rating as expected but lifts outlook to 'stable' https://t.co/p5nn37Tn1L @abhinavvr pic.twitter.com/XVwCDqIs7y

#Italy's bond spread remains > 300 bps as EU rejection of the Italian budget proposal is very likely. pic.twitter.com/LZbnLOGx13

"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.

9.59am BST

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.

Disruption to flights straight after Brexit is "unlikely" and Britain's government would fall if planes were grounded, Ryanair CEO Michael O'Leary says https://t.co/SMvwWkP1Dh pic.twitter.com/CSdvutCdEl

9.28am BST

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.

"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."

9.21am BST

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%.

Global mkts start in Risk-On mood to the week driven by China rally and Italy optimism. Pos comments from China incl support for private enterprises, looser M&A, share buybacks, state fund support. In Europe, Moody's decision to cut Italy rating but upgraded outlook seen as pos. pic.twitter.com/NJR35kUox7

9.04am BST

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.

#Shanghai Composite surged 4% to close at 2654, BIGGEST ONE-DAY RISE IN 2 YRS, after top regulators talked up market and pledged more measures to support the market.
Trading volume hit 3-month high.
BROKERAGES ALL LIMITED UP!!
Shenzhen Component and Chinext up 4.9% and 5.2%. pic.twitter.com/LpNqRosSQi

8.39am BST

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.

8.21am BST

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).

#China is expected to roll out a series of policy measures in the near future to shore up market confidence, #PBOC adviser Ma Jun said in a statement provided to Bloomberg. pic.twitter.com/lzwy58YrGQ

8.03am BST

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.

7.56am BST

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:

7.47am BST

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

"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.

Chinese stocks rallying hard as Beijing's verbal support reverberates through markets:

China H-Shares +3.1%
Hang Seng +2.2%
Shanghai Composite +4.1%
CSI 300 4.4%
ChiNext Index +5.7% pic.twitter.com/au8lCum3G9

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.

It is all about China today whereby stimulus hopes lifted sentiment across the FX markets and helped traders to offset geopolitical and trade concerns. AUDUSD rebounded from this morning dip. Eyes on the GBPUSD as PM plans to announce that EU withdrawal is 95% settled. #AUDUSD pic.twitter.com/O2SP7Y9bxa

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