“I Am Going To See This Through…”

“I Am Going To See This Through”

May formally started on the Brexit divorce in March 2017 negotiating on everything from space exploration, fishing territories, selling complex financial products and the future of the border with Ireland. After more than a year of talks Britain agreed a draft divorce deal with the European Union. Prime Minister Theresa May vowed to fight for her draft divorce stating “I am going to see this through” when questioned whether she would contest any challenge to her position.   She called a news conference to underline her determination to stay on course.  Hostility from the government and opposition lawmakers raised the risk that the deal would be rejected in parliament.  By seeking to preserve the closest ties with the EU, May upset those within her party who expected a clean break and the DUP (Northern Ireland’s Democratic Party, who props up her minority government.  Those who are in favour of closer relations with the EU in her own party and the labour opposition say the deal throws away the advantages of membership for little gain.  Both sides say it throws away power to the EU without securing the promised benefits of greater autonomy.   The deal will need the backing of about 320 of parliament’s 650 MPs to pass.

UK- Resignation of Cabinet Ministers

12 hours after Theresa May announced that her team of top ministers had agreed to the terms of the draft agreement, Brexit minister Dominic Raab and work and pensions minister Ester McVey quit, stating they could not support it.  The resignations of two junior ministers and reports that others were considering quitting, is putting pressure on May’s government and her Brexit strategy, raising the possibility of Britain leaving the EU without a deal.  Lawmakers are considering whether May’s government could survive.  The prime minister showed little sign of backing down.  She said, “ The choice is clear.  We can choose to leave with no deal, we can risk no Brexit at all or we can choose to unite and support the best deal that can be negotiated.” She said that those lawmakers who believed she could get a deal that did not include a backstop arrangement to prevent the return of a hard border on the island of Ireland were wrong.  In parliament, lawmakers from her Conservative Party and the opposition parties took turns to put the draft deal down, a sign that May faces an all but impossible task to get the agreement through the House of Commons. It was the backstop arrangement which would see Britain and the EU establishing a single customs territory that spurred most of the criticism.  EU leaders are ready to meet on the 25^th November to sign off on the divorce deal or Withdrawal Agreement however French Prime Minister Edouard Philippe said events in London raised concerns whether it would be ratified.  Theresa May could be toppled if 158 of her 315 lawmakers vote against her.

Brexit and London’s Financial Centre

The UK and the EU agreed on a deal that will give London’s financial centre only a basic level of access to the bloc’s markets after Brexit.  The agreement will be based on the EU’s existing system of financial market access known as equivalence.  The EU grants equivalence to many countries and has so far not agreed to the demands by the UK for major concessions such as offering broader access and safeguards on withdrawing access.  Neither of them are mentioned in the deal.  Britain’s financial sector which is its major source of revenue and tax has been struggling to preserve the existing flow of trading after it leaves the EU.  Banks and insurers presently have access to customers across the bloc in all financial activities.  Equivalence, however, covers a more limited range of business and excludes major activities such as commercial bank lending.  Such an arrangement would give Britain a similar level of access to the EU same as major US and Japanese firms, while tying it to many EU finance rules for years to come.

Italy                                                               

The Commission, the guardian of EU law, last month sent back Italy’s previous budget plan to be revised because its growth assumptions were too high, the deficit was bigger rather than smaller and debt was to be stable instead of lower.  Rome had until Tuesday to present a new budget, otherwise the EU could start disciplinary steps against Rome later on this month.   After Italy has re-submitted its 2019 budget to the European Commission with no change in growth and budget deficit assumptions but falling debt targets, bond yields hit a three-week high, widening the gap over top-rated German peers.  The revised plan is to sell more State assets and to pay off debt faster.  European fiscal rules require highly indebted governments such as is the case with Italy to cut their structural deficit and debt every year until government books are in balance or surplus in structural terms and public debt is below 60 percent of GDP.  Italy’s debt stands at 131 percent of GDP, which is the second highest in the EU after Greece.    Italy kept its previous plan to raise its structural deficit by 0.8 percent of GDP next year, rather than cut it to meet the requirements of the EU.  In the revised draft, Italy forecasts that its debt would now rapidly fall to 129.2 percent in 2019, 127.3 in 2020 and 126 in 2021.  Markets are doubting this. On Monday Italian bond yields extended their rise.  On Tuesday, the 10 year bond yield rose 9 bps to a three week high at 3.54 percent pushing the gap over the 10 year German bond yield to 314 bps from around 303 bps.

Germany’s Growth

Germany’s GDP dropped by 0.2 per cent last quarter, data showed earlier on Wednesday.  According to the Bundesbank President Jens Weidmann, the fall was due to a one-off weakness in the car industry as it struggled to adjust to new emission testing requirements. The President also said on Wednesday, that Germany’s growth remained on track despite a small drop in output last quarter. Its increasingly visible constraints make the need for monetary policy normalisation even clearer.   He also noted that capacity constraints and a tight labour market create bottlenecks for the economy making further growth difficult.

Dragi at the 28^th Frankfurt European Banking Congress

The European Central Bank still plans to dial back stimulus at the end of the year, but inflation could rise more slowly than earlier expected, said ECB President Mario Draghi.  The Eurozone economy has recently slowed down, amid weaker demand from China, higher interest rates in the US, and jittery bond markets in Italy amid a government that wants to increase spending.  Draghi saw “no reason” to expect the Eurozone’s economy to stop expanding and drag down price growth with it.  He warned of increased uncertainty around the outlook.  Draghi said that the ECB still saw risks to the growth outlook as broadly balanced, but it would reassess the situation in December, when new growth and inflation forecasts become available.  The ECB plans to wind down its 2.6 trillion-euro bond buying programme at the end of this year and guided investors to expect the first interest rate hike since 2011, sometime late next year.  Whilst sticking to those plans in his speech, he advised that an undue rise in euro zone borrowing costs would change the path for interest rates, hitting a spill over from the United States or ripple effects from Italy as possible reasons.  Whilst in his speech he did not mention Italy, he warned about the risk of a widening in sovereign yield spreads which is a measure of investor’s confidence in the public finances of a country.

Bank of Japan

The Bank of Japan has had little success in meeting its two percent inflation target or reviving domestic demand and growth.  Japan’s nominal gross domestic product for April-June, which is the latest data available, amounted to 552.8207 trillion yen.  Meanwhile, in the third quarter, Japan’s economy shrank more than expected, hit by natural disasters and a decline in exports, indicating that trade protectionism is starting to take its toll on overseas demand.  The aggressive asset purchases carried out in recent years mean that the BOJ owns about 45 percent of the 1 quadrillion yen Japanese government bond market.   Since taking the helm in 2013, the Governor of the central bank started this massive stimulus, leading nominal GDP growing to a total of 11 percent, which is one of the fastest growth rates in recent history.  Japan’s central bank has become the first among G7 nations to own assets collectively, worth more than the country’s entire economy, after policies designed to accelerate weak price growth.  It has become the second central bank, after the Swiss National Bank, and the first among Group of Seven countries to own a pool of assets bigger than the economy it is trying to stimulate.    The 553.6 trillion yen of assets that the Bank of Japan holds, are worth more than the combined GDP’s of five emerging markets, Turkey, Argentina, South Africa, India and Indonesia.

China

On Wednesday China delivered a mixed economic report for October as softening retail sales pointed to a slowdown in consumption, even as a pick-up in industrial output and investment suggested support measures may be starting to take hold.   Facing the weakest economic growth since the global financial crisis, Chinese policymakers are pushing on big roads and rail projects, pushing banks to increase lending, and cutting taxes to ease strains on businesses.  According to the National Bureau of Statistics, retails sales rose 8.6 percent in October from a year earlier which is the slowest since May.  A decline in autosales has put the world’s biggest car maker on the verge of it first annual contraction since at least 1990.  Sale of clothing is growing at its weakest pace in over two years amid faltering consumer confidence.

US Inflation

A Labour Department report on Wednesday shows that, excluding food and energy, the core consumer price index rose 2.1 percent from a year earlier.  It was up 0.2 percent from the prior month, the fastest gain in three months and in line with projections.  Inflation saw little sign of breaking out in October, despite strength in economy and wages, and is likely to keep the Federal Reserve on the path of gradually increasing interest rates.  Inflation is gradually becoming steady, amid solid household demand, a tight job market and the tariff war with China, which can further increase price pressures.  The gains in energy prices since January, boosted the broader consumer price index, which rose 0.3 percent in October, following a 0.1 percent gain the prior month and up 2.5 percent from a year earlier.

US State Spending

US state spending exceeds $2 trillion in fiscal 2018 with Medicaid expenditures rising the most along with an increase in transportation spending, according to a report released on Thursday.  Total expenditures grew by an estimated 4.8 percent (fiscal year 2017: 3.8 percent) said the National Association of State Budget Officers in the annual state expenditure report.  The annual report focuses on the seven top state spending categories, amongst which are elementary and secondary education, higher education, public assistance, Medicaid, and transportation.  Medicaid which is the state and federal healthcare program for the poor grew the most at 7.3 percent.  Transportation spending increased by 6.5 percent which represents 8 percent of the total state expenditures.  The rise indicates a growing focus on infrastructure.

Currencies

On Monday the dollar surged to its highest points in 16 months against a basket of currencies and stocks fell amid political concerns in Europe. As investors built bets on an increase in the Federal Reserve interest rate next month, the dollar gained strength.  In Europe, fears about a no deal Brexit and a growing rift over Italy’s budget has put pressure on the euro and the pound.    The dollar index rose 0.57 per cent while the euro was down 0.74 percent to $1.125.  Upon news of a Brexit divorce deal on Tuesday, the sterling which has fluctuated since reaching $1.50 just before the 2016 Brexit referendum with a 52-48 percent margin for leaving the EU surged, but erased some of its gains amid criticism for Theresa May.  On Wednesday, the dollar held its earlier losses against a basket of currencies as data showed US consumer prices grew in line with analysts’ forecasts in October, reinforcing the view that domestic inflation is increasing at a moderate pace.  After the Brexit deal with the European Union was plunged into uncertainty, the dollar jumped and traders bought into the safe haven yen.  Meanwhile, the resignation of some British ministers amid the agreed Brexit deal sent the sterling plummeting more than one percent.  The pound recovered slightly as May sought to sell the benefits of the deal in a speech to the British parliament.    It also dragged the euro into negative territory as investors were concerned about the turmoil in the UK.  The euro fell to $1.1291.  Meanwhile, reports out of Italy, that Prime Minister Giuseppe Conte was looking to work with the EU over his government’s 2019 budget in order to avoid massive fines, had earlier helped support Italian government bond markets and the euro.

Markets Wrap

Apple shares fell as the main supplier for its Face ID technology, Lumentum Holdings Inc slashed revenue and profit forecasts, citing reduced orders from a major customer.  The shares of Lumentum tumbled 31.3 per cent and shares of other Apple suppliers also tumbled.  Also, screen maker Japan Display Inc lowered its full-year outlook on weaker demand from smartphone makers.  Meanwhile, the S&P 500 technology sector, which is a main driver of the long US bull run in stocks, tumbled 3 percent.  Meanwhile in Europe, Tech stocks were also weak as the pan-European Stoxx 600 index lost 0.84 per cent.  Reports from a host of major US companies have shown the impact of tariffs and a slowdown in China on corporate profits.  Also, reports from major retailers are expected to show how rising wages are eating into margins.  On Tuesday US stocks rose, as technology stocks bounced back after a steep selloff on Monday and hopes of progress in the US-China trade talks boosted industrials.  However, the decline in the price of Apple Inc curbed gains, entering its fourth day in the red.  Helping the markets was a report that said China’s top trade negotiator was preparing to visit the United States before a meeting between the leaders of the two major economies.

Oil

Oil prices rose after Saudi Arabia said OPEC and its partners believed demand was softening enough that warrant an output cut of 1 million barrels per day next year.  US crude rose 1.08 percent to $60.84 per barrel and Brent was last at $70.95 up 1.1 percent on the day.  On Tuesday oil prices fell more than 1 percent with the Benchmark Brent crude slipping below $70 per barrel and US crude under $60 after President Donald Trump put pressure on OPEC not to cut supply to prop up the market.  The dollar hovered around its 16 month highs making oil more expensive for importers using other currencies.  Trump has made it clear he wants oil prices to fall.  On Wednesday, oil prices extended a steep slide amid worries about weakening world demand and oversupply.  OPEC warned that the demand for its crude is falling faster than expected.  A barrel of West Texas Intermediate for December delivery was virtually unchanged at $55.75 as the International Energy Agency (IEA) welcomed the oil market’s return to surplus.  On Friday Oil prices rose amid expectations of supply cuts from OPEC although record US production dragged, with the US West Texas Intermediate crude oil futures were $56.96 per barrel.  Prices were mainly supported by expectations that OPEC would start withholding supply soon.  Saudi Arabia wants the cartel to cut output by about 1.4 million barrels per day around 1.5 percent of global supply according to Reuters.

Company News

General Electric

GE will sell assets with “urgency” to reduce its high debt said Chief Executive Officer Larry Culp.  Culp is facing tough questions about GE’s financial strength and profit outlook after being named CEO with a mandate to turn around the conglomerate.  Last month GE posted a quarterly loss of $22.8 billion, cut its annual dividend to just 4 cents a share and told investors it was facing a deepening federal accounting probe.  The power unit lost $631 million in the quarter and GE wrote down $22 billion in goodwill because expected future profits in the unit appear unlikely.

Amazon.com

Amazon.com Inc selected New York and Northern Virginia for its second headquarters, a source told Reuters.  The plan to split its second headquarters between two cities will boost its presence around New York and seeks to gain a recruiting edge over Silicon Valley tech firms.

Malta:  Outbound Tourism

During the third quarter of 2018, outbound tourist trips towards the EU and non-EU countries increased by 16.1 and 16.8 per cent respectively, when compared to the same quarter in 2017.  Italy and the United Kingdom remained the most popular destinations, with a joint share of 46.5 percent of total tourist trips.

Malta:  Harmonised Index of Consumer Prices (HICP) – October 2018

In October 2018, the annual rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) was 2.1 percent, down from 2.5 per in September 2018.  The largest upward impact on annual inflation was measured in the Restaurants and Hotel Index, while the largest downward impact was recorded in the Recreation and Culture Index.

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