“Italy Sends Shockwaves To The Financial Markets …..”

Italy Sends Shockwaves To The Financial Markets

A political crisis started in Italy when the 5-Star Movement and the right-wing League abandoned their plan to form a coalition after the head of state Sergio Mattarella rejected their choice of 81 year old Eurosceptic economist Paolo Savona as finance minister.  Carlo Cottarelli was appointed to form a government to oversee fresh elections around the end of the year.  The prospect of a quick return to the polls which is likely to lead to a Eurosceptic government that could put Italy’s euro zone membership in question effected the euro to move into a multi-month lows and Italian bonds and shares followed.  The short dated Italian bond yields which are a sensitive gauge of political risk, fell almost half a percent from half-decade highs after suffering their worst day in nearly 26 years on Tuesday.  Meanwhile on Thursday the anti-establishment parties revived coalition plans, by announcing a government that promises to increase spending, challenge European Union fiscal rules and crack down on immigration.  The coalition deal removes the risk of a repeat vote, a prospect that sparked a big selloff in Italian financial markets this week.  The breakthrough came after the League and 5-Star agreed to drop economist Paolo Savona as their choice for economy minister who will be replaced with Giovanni Tria, another little-known figure.  Savona will be in government as European affairs minister, with a less powerful role but one which will still allow him to negotiate with Brussels and speak on EU issues.  Although investors were relieved to avoid repeat elections, which they feared could end in a referendum on the euro, they are now likely to focus on the big spending plans of the League and 5-Star which could add to its debts.

Euro-Area Inflation

Euro-area inflation picks up to the fastest pace in more than a year.  The 1.9 percent rate which in April was 1.2 percent, is in line with the ECB goal and well ahead of analysts’ expectations.  The core measure rose to 1.1 percent, which exceeded expectations.

Malta – Announcement by GRTU

In an announcement the GRTU has welcomed the introduction of the GDPR and called on businesses to take this law seriously and for the authorities to guide and not punish.  The GDPR came into force on the 25^th May and noted that whilst supporting the rights of citizens and the importance to protect their personal data, more time needs to be given for the full implementation by businesses.  The aim of the GDPR is to bring all member states in line under a common regulation. The GDPR increases the privacy for individuals and aims to ensure that any personal data gathered is gathered lawfully with the consent of the individuals.

Malta – Property Market in Malta

In an article on the Malta Business Observer Issue 85 it was reported that property in Malta has become an increasingly hot commodity, where demand for on-plan builds has reached an all time-high, with most real estate projects now being sold long before construction has reached completion stage.

Early Elections in Spain?

Spanish Prime Minister Mariano Rajoy had to face a vote of confidence in his leadership on Friday due to corruption convictions to some people linked to his center-right People’s Party.  He already survived a no-confidence vote last June.   News about the no-confidence vote helped drive the Spanish government borrowing costs to 2 ½ month highs and the Spanish index turned lower.  The yield on Spanish bonds relative to the German bond was at its widest differential since the start of the year.    Opposition parties are taking advantage of Rajoy’s weakness after 29 people who were linked to the People’s Party were convicted of crimes such as influence-peddling and falsifying accounts.   The Socialists have proposed their leader Pedro Sanchez as a replacement for Rajoy.  On Friday, Sanchez took over as Spain’s prime minister, after leader Mariano Rajoy lost a parliamentary confidence vote.  Sanchez will become Spain’s seventh Prime Minister since its return to democracy in the late 1970s following the dictatorship of Francisco Franco.

The US To Continue To Trade Actions Against China

The United States said on Tuesday that it still holds the threat of imposing tariffs on $50 billion of imports from China and will use it unless Beijing addresses the issue of theft of American intellectual property.   A statement from the White House said that Washington will press ahead with restrictions on investment by Chinese companies in the United States as well as export controls for goods exported to China.  By 30 June details of the investment and export control will be issued whilst the final tariff list will be published by 15 June.  A list of the potential tariff targets has already been published by the United States Trade Representative and it largely includes intermediate goods used by companies to make other products as well as some consumer goods like televisions.  Threats of a trade war between the United States and China had hit financial markets hard.  China and the US earlier this month agreed to look at measures to reduce the trade surplus of China with the United States.  This move appeared to reduce the risk of a trade war between the world’s two largest economies.  The Commerce Secretary from the US is to visit Beijing this week to try and get China to agree to firm numbers for additional US exports to the country.  The United States had wanted China’s trade surplus with America to shrink by $200 billion in two years.   There is room for exports to China to increase by selling more agricultural commodities and energy products and China has agreed in principle to import more, however there is still not a firm agreement between the two countries.

China’s Response To US Trade Threats

China was ready to fight back if Washington was ready for a trade war, days ahead of a planned visit by US commerce Secretary Wilbur Ross. The change in tone came about after the United States said that it still held the threat of imposing tariffs on $50 billion of imports from China unless it addressed the issue of theft of American intellectual property.  The trade issue escalated after the two sides had agreed during talks in Washington this month to find steps to narrow China’s $375 billion trade surplus.  Ross is expected to try to get China to agree to firm numbers to buy more US goods during a visit between the 2^nd and 4^th June to the Chinese capital.

US and North Korea Enter Second Day of Nuclear Talks

U.S. Secretary of State Mike Pompeo and high-ranking North Korean official Kim Yong Chol entered a second day of meetings in New York on Thursday as they tried to settle nuclear weapons disagreements and set the stage for a historic summit between their leaders.

Trump and The Car Makers In Germany

According to a German magazine Wirtschaftswoche, US President Donald Trump aimed to push German carmakers out of the United States, and told French president Emmanuel Macron he wanted to stop Mercedes-Benz from cruising through New York.  The Trump administration has opened a trade investigation as to whether vehicle imports have damaged the US auto industry.  When compared to other nations within the EU, Germany is the biggest exporter of cars to the United States. German carmakers control 90 percent of the US premium auto market, wherein, BMW owns the Rolls-Royce and BMW brands, while Daimler has Mercedes-Benz and Volkswagen controls Bentley, Bugatti Porsche and Audi.  According to VDA industry association, German automakers assembled 804,000 cars in US plants last year but exported another 657,000 to North America from Germany.

2-Month Exemption Ended

In a telephone interview, US Commerce Secretary Wilbur Ross told reporters that a 25 percent tariff on steel imports and a 10 percent tariff on aluminium imports from the EU, Canada and Mexico would go into effect on Friday.   This ended a two month exemption and possibly set a trade war with some American allies.  Ross did not give details about the approach the EU, Canada and Mexico could take to have the tariffs lifted.  Meanwhile, the German steel industry association said justifying US steel tariffs based on national security concerns is “grotesque”.  Germany’s Economy Minister said early on Friday that the EU might look to coordinate its response with Canada and Mexico.  Late on Thursday, Trump issued a statement about the NAFTA negotiations, saying the days of the United States being taken advantage of on trade were over.  Trump said, “The United States will agree to a fair deal, or there will be no deal at all.”

Drug Companies

On Wednesday President Donald Trump said that he expects major drug companies to slash prices on their products in two weeks, but he did not provide details on which companies would do so or how such reductions are to take place.

US Consumer Spending

US Consumer Spending increased more than expected in April, indicating that economic growth was regaining momentum early in the second quarter, while inflation continued to rise steadily.  According to the Commerce Department, consumer spending which accounts for more than two-thirds of the US economic activity, jumped 0.6 percent last month, the biggest gain in five months.  Spending was boosted by purchases for gasoline and other energy products whilst nondurable goods purchases increased 0.9 percent.  Outlays on services rose 0.5 percent, lifted by demand for household utilities.  Prices continued to rise gradually.  The personal consumption expenditures (PCE) price index excluding the volatile food and energy components, increased 0.2 percent for the third straight month.  The core PCE price index which is the Federal Reserve’s preferred inflation measure stood at 1.8 percent whilst the US central bank has a 2 percent inflation target.

China

Growth of the manufacturing sector in China is expected to have dipped marginally in May.  This would ease the concerns of a slowdown in the world’s second-biggest economy arising from the treat of a trade war with the US.  Economic data for April showed a mixed picture for the Chinese economy, with investment growing slowly to a near 20 year low and growth in retail sales sliding.  Meanwhile the industrial sector which is a key source of jobs, remained healthy growing at their fastest pace in six months, underpinned by strength in the steel sector.  China has been tightening controls on riskier investments, the shadow banking business and speculation in the property sector, but there was no cutting of funding to the real economy.  It has cut electricity prices for industrial users by about seven per cent so far this year.

Currencies

The Euro bounces off its 10 month lows as Italy tries to end the turmoil on reports that Italy’s biggest party would make a renewed attempt to form a coalition government and end months of political turmoil.  The attempt by the two anti-establishment parties to form a new government in Italy collapsed at the weekend, raising the prospect of an early election.  The euro rallied and the yields on the Italian government bonds settled below multi-year high after Tuesday’s market slide.  The euro dropped 1 percent against the safe-haven Swiss franc on Tuesday in its biggest daily fall since September, but it recovered 0.6 percent to 1.1508 francs.  The dollar index measured against a basket of currencies slipped 0.4 percent below Tuesday’s 6 ½ month high.  Meanwhile, sterling recovered on Wednesday from the previous day’s six month low as currencies stabilised after italy’s political crisis hit the global financial markets.  The British currency edged 0.1 percent higher at $1.3293 after falling to its lowest levels on Tuesday since 20 Nov.  It also weakened against the euro by half a percent to 87.46 pence thanks to a broad-based euro bounce.  On news about the 1.9 percent euro inflation reading, on Thursday the euro rallied and held over the $1.17 following the release.

Oil

Oil has climbed to $76 a barrel on Wednesday, supported by tight supplies although there were expectations OPEC and its allies Saudi Arabia and Russia would pump more oil in the second half of 2018 to counter the effect of the supply shortfalls from Venezuela and Iran.   Brent Futures traded around $75.50 per barrel well off the recent 3½ year highs above $80.  One feature of the oil market this year has been the widening spread between the WTI and Brent crude as American shale production has increased pressure on the US benchmark.

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