“EU Leaders Meeting In Salzburg, Austria…”

EU Leaders Meeting In Salzburg, Austria

EU leaders met in Salzburg Austria for an informal summit to discuss migration and Brexit.  On Thursday they lined up to tell Theresa May she needs to give guarantees on the Irish border before they will grant her the Brexit deal the prime minister wants.   From her end, May told EU leaders there will be no second referendum and no extension to talks and that the UK will leave the bloc next March.  She further told her counterparts that “the UK will leave on 29 March next year” and a result “the onus is now on all of us to get this deal done” by the end of an emergency summit that the EU confirmed would happen in mid-November.  However, the President of the European Commission, Jean-Claude Juncker said that a deal remained “far away” while Donald Tusk, the president of the European council, warned that the UK’s proposals for the Irish border and future trade relations with the EU needed to be “reworked and further negotiated”.  During the summit May has rejected the proposals put forward by Barnier for a revised Irish backstop border because the EU is still insisting on customs checks in the Irish Sea if the two sides cannot strike a free trade agreement after Brexit.  A long debate over migration left only a small place for the prime minister to give her views on Brexit talks.  The subject of Brexit will be dealt with again on Friday, where the issue will be discussed without the British leader present.

The ‘No deal’ Saga

Bank of England (BOE) Governor Mark Carney, according to The Guardian, warned the ministers, including Theresa May that the impact of a chaotic no-deal Brexit could be as catastrophic as the 2008 financial crises.  According to Carney, Britain’s property market would crash and mortgage rates would spiral up in the event of a no deal Brexit, with house prices falling 35 percent over three years (this was reported in the Times newspaper).  Whilst speaking at the Irish central bank on Friday, Carney did not directly address the media reports but reiterated that the BOE had tested banks against “very severe” scenarios including “dramatic house price falls” and much higher interest rates. The BOE has long said its bank stress tests represent worst-case scenarios rather than forecasts of likely outcomes.  In recent months, May and its government have stepped up planning for a no-deal Brexit and has underscored the disruption that such a move would cause to businesses and the public. Without a deal in place the UK would move from a seamless trade with the rest of the EU to customs arrangements set by the World Trade Organisation for external states with no preferential deals.  According to Carney (as said in the Times) a chaotic exit would lead to a plunge in sterling that could drive up inflation and interest rates.  Furthermore, according to the Financial Times, Carney told ministers that the Bank of England would be unable to soften the crisis by cutting interest rates because of the inflationary impact of such a move.

Brexit Deal

The UK is due to leave the European Union on 29 March and yet the situation is still unclear.  May’s government and her Brexit plan is in doubt because it is unclear whether she can command the 320 votes she needs in the House of Commons, the lower house of the British parliament, to approve a deal.  On BBC TV, May said that, “I think that the alternative to that will be not to have a deal”.  She is confident she will get a good agreement that parliament would ultimately approve.  Recently signals from Brussels have buoyed hopes that the UK and the EU can agree and approve a proper divorce arrangement before it leaves, however there is still division on about one fifth of the detail of a deal.  May has acknowledged that failure to reach a deal would imply some upheaval.  According to International Monetary Fund Managing Director Christine Lagarde failure to get a deal would make the economy shrink.  The economy will grow around 1.5 percent this year.  She is hoping there will be a deal between the UK and the EU.  Although some of the withdrawal agreement has already been drafted, there are still some parts that require further negotiation.  One of them is the issue of how to avoid a hard border between Ireland and Northern Ireland.

Italy’s Bond Market

Markets have been on edge over Italy’s next budget after an anti-establishment coalition took power in early June, pledging to ramp up public spending and to unwind past deficit-curbing measures.  Recently there was positive sentiment towards Italian bonds after top officials said the government will respect European Union rules on fiscal discipline.   Whilst most of the Eurozone bond yields were largely flat, Italy stood out as the best performing debt market out of the bloc.  On Monday yields on Italian debt fell as much as 12 basis points.  The yields on the 10 year bonds were down 8 bps at 2.91 percent pushing the gap over the benchmark German Bund yields to 244 bps.  Meanwhile, other European bonds such as Germany’s 10 year bond yield was steady at 0.45 percent below the six-week highs hit on Friday whilst Portuguese bond yields dipped after the S&P on Friday lifted the outlook on Portugal’s credit rating to positive.

Italy Seeks Eurozone Debt Restructuring Backed By ECB

European Affairs Minister wrote that Italy wants the public debt of all euro zone states to be brought below 60 percent of gross domestic product, via a long term restructuring underwritten by the European Central Bank.  The proposal was made in a paper posted on the website of the European affairs Minister Paolo Savona and sent to the European Commission.  Savona, envisages a reduction of the countries’ debts to the 60 percent threshold set under Brussels guidelines through “a very long-term repayment plan and at official rates.”  He further wrote that the ECB should offer a “guarantee” in exchange for “a mortgage on future tax revenue or individual public assets in the event of non-repayment of one or more instalments.” The Commission received Savona’s paper and welcomed it along with other contributions for important debates on euro zone reform.  The ECB had no immediate comment.

UK Inflation

Inflation in the UK jumped unexpectedly to a six-month high in August, supported by bigger than usual seasonal increases in sea and air fares and higher theatre admission prices according to official data.  According to the Office for National Statistics (ONS), consumer price inflation rose at an annual rate of 2.7 percent in August, compared with 2.5 percent in July.  The ONS said that British house prices rose at the weakest annual rate in nearly five years, dragged down by the biggest drop in London house prices since 2009.   Last week the BOE said it expected inflation to cool to 2.4 percent in August.  The rise in inflation in August could present a setback to the modest recovery in real-terms wage growth that has helped to support economic growth this year.  According to the ONS, house prices in July rose by an annual 3.1 percent across the United Kingdom as a whole when compared to June with 3.2 percent.  This is the weakest increase since August 2013.   In London house prices alone fell 0.7 percent year on year in July, the biggest drop since September 2009.

Trump Slaps Tariffs On $200 bln In Chinese Goods

US President Donald Trump escalated his trade war with China on Monday and imposed 10 percent tariffs on about $200 billion worth of Chinese imports.  In a Statement announcing the new tariffs Trump warned that if China takes retaliatory action against US farmers or industries, “we will immediately pursue phase three which is tariffs on approximately $267 billion of additional imports.”  So far, smart watches from Apple and Fitbit and other consumer products such as bicycle helmets and baby car seats have not been hit.  The escalation of tariffs on China came along as talks between the two largest economies to resolve trade differences produced no results.  Last week US Treasury Secretary Steven Munchin invited top Chinese officials to a new round of talks but so far nothing is scheduled. The US Trade Representative’s office eliminated 297 product categories from the proposed tariff list along with some subsets of other categories, however officials from the administration said that the total value of the revised list would still be around $200 billion.

China’s Reaction: Hits By $60 bln of US Goods

China will levy tariffs on about $60 billion worth of US goods in retaliation for new US tariffs, as was planned, however, has reduced the volume of tariffs that it will collect on the products.  The tariff rates that have been levied are at 5 and 10 percent instead of the previously proposed rates of 5, 10, 20 and 25 percent according to the Finance Minister.    China will impose a 10 percent tariff on US products that were previously designated for a rate of 20 and 25 percent.  The new tariff measures will take effect on 24^th September the date when Trump administration says it will levy new tariffs of 10 percent on $200 billion of Chinese products.  China’s yuan currency dropped on Tuesday after the imposition of duties on Chinese imports by the US.  The Shanghai stock market has so far lost 20 percent in 2018, and has joined the crisis that has hit Turkey, Argentina and Venezuela among the world’s four worst performers.  Besides the drop in share values, the currency has fallen sharply and share transaction volumes have shrunk.   China will not revert to competitive devaluation of its currency, stressed Premier Li Keqiang, hours after China hit back.  Whilst addressing a world economic forum in Tianjin on Wednesday, he did not mention the trade conflict directly but said that the talk of Beijing deliberately weakening its currency was “groundless”.

Currencies

On Tuesday the British pound pulled back from six-week highs as traders booked profits and investors took a more cautious view on the Brexit deal ahead of the European Summit held this week.  Sterling rallied around 4 percent from its 2018 low hit in mid-August amid fears that Britain will exit the EU without a deal.  Against the dollar the pound dipped 0.1 percent after briefly touching $1.3173 in early trading, this is the sterling strongest since 31^st July.  Meanwhile, against the euro, the British currency weakened 0.2 percent to 89.08 pence and was heading for its biggest daily decline in over two weeks.  The dollar held at a two-month high against the Japanese yen and commodity currencies rose on Wednesday amid relief that the tariffs announced by China and the US were not as harsh as the market expected.  Emerging market currencies firmed, led by the Indian rupee, after China said it won’t retaliate with competitive currency devaluations.

Turkish Lira

The Turkish lira weakened against the dollar on Monday as investors weighed up the impact of last week’s massive rate hike.  Attention turned to the government announcement of this week about the medium-term economic plan.   The lira stood at 6.19 against the US currency, weakening from a close of 6.1725 on Friday a day after the central bank raised its benchmark rate by 625 basis points. The currency recovered 4 percent against the dollar last week but was still 39 percent weaker this year amid concerns about President Tayyip Erdogan’s influence over monetary policy and diplomatic friction with the United States.  On Thursday, the Turkish lira weakened slightly ahead of the announcement by Finance Minister Berat Albayrak, of the government’s medium-term economic programme.  He has promised cost-cutting measures and more efficient spending as the economy enters an expected sharp slowdown.  Erdogan has described himself as the “enemy of interest rates”.  Financial markets were concerned about Erdogan’s control over monetary policy, which they say have undermined the ability of the central bank to fight inflation which is currently at 18 percent.

Japan

The Bank of Japan kept monetary policy steady on Wednesday and kept with its view that the economy will continue to expand modestly even if there are fears of global trade frictions that could have an impact on growth.  As was widely expected the BOJ maintained its short-term interest rate target at minus 0.1 percent and that for long-term rates around zero by a 7-2 vote. The bank continued with its July pledge of keeping rates very low for an extended period as inflation remains far off its 2 percent goal.

Oil

Global oil prices edged up from early losses on Monday despite assurances from Washington that Saudi Arabia, Russia and the United States can raise output fast enough to offset falling supplies from Iran and elsewhere.  Brent crude oil futures gained 25 cents to $78.34 per barrel while US West Texas Intermediate futures rose 28 cents to $69.27 a barrel.  Iran’s oil exports are decreasing as  more buyers including India, which is the second largest buyer has cut imports ahead of US sanctions which will be imposed in November.  Washington is aiming to cut Iran oil exports down to zero to force Tehran to re-negotiate a nuclear deal.  Iran is the third-largest producer among the members of the Organisation of the Petroleum Exporting Countries.  On Wednesday, US oil futures surged nearly 2 percent as they were bolstered by a fifth weekly crude inventory drawdown and strong domestic gasoline demand, amid ongoing global supply concerns from the imposition of sanctions by the US on Iran.  According to government data, US crude inventories fell 2.1 million barrels last week to 394.1 million barrels, the lowest level since February 2015.  US crude futures settled up $1.27 at $71.12 a barrel, while Brent futures also rose but the gains were more muted as the global benchmark ended 0.5 percent higher at $79.40 a barrel.  Meanwhile, OPEC and other producers including Russia meet on 23^rd September in Algeria to discuss how to allocate supply increases within their quota framework to offset the loss from the Iranian supply.

H&M

Shares of H&M have bounced back in the third quarter amid new logistic system as the company revamped its business to meet growing online business.  On Monday the shares jumped as much as 13 percent.   H&M has seen profits shrink and inventories pile up over the past couple of years as its core budget brand has lost sales to low-price rivals such as Primark, Forever 21 and online competitors ASOS and Zalando.  The company has invested heavily in digitalization, cut prices and launched a review of its mix of stores and brands, closed some H&M stores and expanded its newer brands more quickly.  The company is also working on a new H&M store concept.  H&M will report its full year fiscal third-quarter figures on 27^th September and said that the steps it has taken “to face the major shift within the industry” had contributed to gradually improved sales and increased share in many markets.

Mario Draghi’s Call For Euro Area Fiscal Instrument

On Wednesday European Central Bank Mario Draghi said that the Eurozone needs a new fiscal instrument and more public risk-sharing to fight the sort of crises that have left lasting scars on the currency bloc’s economy and society.  He further added that only a big step towards further integration could boost growth and productivity, easing the economic malaise that made some people question the European project.  According to Draghi, sharing risks, boosts confidence and stability, and added that a way to achieve it would be to create a common fiscal tool that would fight market speculation during crises.

Malta:  Retail Price Index – August 2018

In August 2018, the annual rate of inflation as measured by the Retail Price Index (RPI) was 1.12 per cent up from 1 per cent in July 2018.  The largest upward trend movement was measured in the Food Index, while the largest downward impact was recorded in the Clothing and Footwear Index.

Malta: International Economic And Financial Transactions: Q2/2018

During the second quarter of 2018, Malta registered a current account surplus of EUR 384.8 million as compared to a surplus of EUR 525.4 million in the comparable quarter of 2017.  Leading to this surplus was primarily a positive net balance of the services account, equivalent to EUR 996.8 million, marked by improvements in the net balances of the other services, travel and transport accounts.  Furthermore, the secondary income account recorded a positive net balance of EUR 28.9 million. These were partially offset by declines in the goods and primary income accounts of EUR 445.9 million and EUR 195.1 million respectively.

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