“Italy’s Election…..”

Italy’s Election

Italy will go to the polls on the 4^th March.   The latest polls point to a hung parliament, where no one party or coalition has a majority to form a government.  Should this happen, Italian President Sergio Mattarella, will call on parties to form a broader coalition of pre-election adversaries which could include the ruling centre-left Democratic Party and Silvio Berlusconi’s Forza Italia. Silvio Berlusconi,  former prime minister has been convicted of tax fraud and is banned from being titular head of government.   Any uncertainty over the make-up of the government could lead to short-term volatility.  This election is taking place under a new, untested voting system introduced last year.  It makes the outcome particularly uncertain.  Sergio Mattarella will have a tough job after the election, but he is very well equipped for it.   After the election, there will be some time for negotiations before pressure builds.  Parliament will meet for the first time on 23 March allowing at least three weeks of talks before a government can be seated.  Italy can opt to obtain a non-partisan technocrate who is more acceptable to a broad range of parties.  Italy has had several of these such as Carlo Azeglio Ciampi and Lamberto Dini in the 1990s to former European Commissioner Mario Monti, appointed at the peak of the euro zone debt crisis in 2011.  Parliament’s first task will be to elect the speakers of the two houses.  Will Italy’s election tackle the debt saga?  At 132 percent of GDP, Italy has the European Union’s worst debt ratio after Greece.  It is unlikely that the next government will push through long-term structural reforms to improve the economic performance or to tackle Italy’s accumulated debt.   Bank of Italy Governor Ignazio Visco has cautioned that pledges by parties to slash taxes and hike spending, could prove counterproductive as the problem of high debt “cannot be sidestepped.”

Markets

Jerome Powell who took over from Janet Yellen this month spoke before the House Financial Services Committee on Tuesday and the Senate Banking committee two days later in what is known as the Humphrey-Hawkins testimony.  Some strategists are expecting a more aggressive Fed and further bond market losses ahead.  In his speech Powell opened the door to four Fed rate increases this year saying his personal outlook for the economy had strengthened.  His testimony in Congress was viewed as hawkish by the markets.  The ten year yield has reached a four-year high of 2.9537 percent on Wednesday of last week as the Fed released minutes of its most recent policy meeting.  In view of the increase in the treasury yields this year, some analysts are already reviewing their projections for the year, for example Bank of America Corp. last week raised its 10 year US yield forecast for year-end to 3.25 percent from 2.9 percent.  Similarly Goldman Sachs Group Inc. boosted its estimate for the end of 2018 to the same level.  Meanwhile the recovery in global stocks endures from Friday’s strong performance.  US stocks rallied, Treasuries advanced and the dollar slipped as investors grew confident that Jerome Powell will not rush to raise interest rates as the economy picks up.  The S&P 500 Index pushes past its average price for the past 50 days and erased losses for the week with its biggest gain in almost three weeks.  Investors also digested Powell’s testimony in the Senate Banking Committee who called for gradual interest rate hikes and said the economy was not overheating.   Many were on edge during his second day of Congressional Testimony after his comments on Tuesday, about the strength of the US economy, raised speculation that the central bank plans to quicken the pace of monetary tightening.  Many investors worry that such a move could derail growth.

German Court Rules Over Diesel Cars

A top German court ruled in favour of allowing major cities to ban the most heavily polluting diesel cars.  The decision is set to hit the value of 12 million vehicles in Europe’s largest car market and carmakers may need to cater for modifications.  The ruling by the country’s highest federal administrative court came after German states had appealed against bans imposed by local courts in Stuttgart and Dusseldorf in cases brought by environmental group DUH (Deutsche Umwelthilfe) over poor air quality.  The court on Tuesday rejected the appeals by the state governments and ordered Stuttgart and Dusseldorf to change their anti-pollution plans saying that city bans can be implemented even without nationwide rules.  After the ruling the share prices of automakers Volkswagen, Daimler and BMW went down by 1.7 percent, 0.4 percent and 0.8 percent respectively.  Since the Volkswagen scandal, when the automaker admitted in 2015 to cheating US exhaust tests, and fears of driving bans, demand for diesel cars has fallen sharply in Germany in the last year.  Furthermore, countries such as Paris, Madrid, Mexico City and Athens have said they plan to ban diesel vehicles from city centres by 2025.  In Copenhagen the mayor wants to ban diesel cars from entering the city as soon as next year.

Malta:  Gets An Upgrade From Moody’s And DBRS

DBRS and Moody’s, two international credit rating agencies, have upgraded Malta’s economy.  DBRS upgraded Malta from “A” to “A high” which is the highest rating, while Moody’s modified the rating from “A3 stable” to “A3 positive” which is the first upgrade given by the agency to Malta since October 2013.  DBRS said that in 2017 the government is expected to have exceeded its fiscal objective and reduced its debt ratio thanks to stronger than expected revenues.  From the analysis undertaken the key factors behind the upgrade were improvements in “debt and liquidity”, “economic structure and performance” and “fiscal management and policy”.    Meanwhile, Moody’s chose to upgrade Malta’s rating because of “Malta’s improving fiscal strength, due to a sustained pace of public sector debt reduction supported by prudent fiscal policy and containment of contingent liabilities.”  Moody’s said that a surplus of 1.5 percent was achieved in 2017, as against the 3.5 per cent deficit in 2012.

Slower Euro-Area Inflation

The rate of price growth slowed to 1.2 percent in February from 1.3 percent, dropping to its weakest since 2016.  The core measure was unchanged at 1 percent.  This week, Mario Draghi emphasized to lawmakers that an expansionary policy is still warranted even as the economic situation is “improving constantly”.  At the same time he’s more confident that declining unemployment will boost pay and inflation eventually, even if the rate for now remains below the ECB’s target of just under 2 percent.  The European commission said on Tuesday that the euro-area economic sentiment slipped for a second month in February after touching a 17 year high in December.

The European Union’s Draft Brexit Deal

It has been almost a year since Theresa May has triggered the withdrawal of the UK from the EU bloc and talks have yet to begin on what kind of trade accord will follow. As time is running out, conflicts still remain over issues between the UK and the EU.  Uncertainty will cause damage to the British businesses who would like a status quo transitional phase to be agreed by the end of March, at the latest, to help them plan and adapt when Britain will leave the EU in March 2019.  A draft legal text published by the European Commission drew criticism from a unionist party in Northern Ireland and British Prime Minister Theresa May said it would undermine the UK’s common market and threaten its constitutional integrity.   Theresa May rejected the European Union’s draft document saying she would never accept the proposal, which risked putting a border between Great Britain and Northern Ireland.    Her government is stepping up its fight with the EU over the terms with which Britain will depart.  As more negative Brexit related headlines have emerged investors have reduced long positions in sterling.

US – Trump’s Metal Duties

President Donald Trump promised to impose substantial tariffs on foreign metals, drawing sharp disappointment from the manufacturing industry group and the European Commission.   The Institute for Supply Management called the proposal a “big mistake” while European Commission President Jean- Claude Juncker said that Europe will respond “firmly” to any new tariffs.  With the news, US stocks plunged and Treasuries climbed on Thursday.   While industrial companies in the S&P 500 tumbled, US Steel Corp. saw its price increasing 5.7 percent and steel-products company Nucor Corp gained 3.5 percent.  On the other hand, automakers were decliners such as Ford Motor Co. and General Motors Co as they added to losses resulting from weak sales numbers.  Amongst the major indices, the Russell 2000 posted the smallest loss as the members’ sales are derived from the US.  The CBOE VIX measure climbed to 23 from less than the 20 level earlier. 

Scotch whisky

Scotch whisky makers are already busy preparing for transport and logistical challenges.  The industry would be happy to stay in the EU single market and the customs union after Britain leaves the world’s largest trading bloc if it had a say in regulations and a right to make a bilateral trade deals.  According to Karen Betts, chief executive officer of the Scotch Whisky Association (SWA) then it would be better to have no deal and default to World Trade Organisation rules, that mandate a zero per cent tariff on Scotch imports into the EU.  The industry position matters as Scotch exports were worth £4.36 billion in 2017, more than one fifth of all of Britain’s food and drink exports including 40,000 jobs.  Advantageous tariffs under the WTO apply to almost all spirits.  While the supply chain is almost all UK-based, exports account for 90 percent of output, as the industry has seen benefits from the weakness in the pound post-Brexit.  The industry certainly needs clarity about the terms under which Britain will leave the EU and how much time it has to get ready for it.  A huge concern which is shared by other goods exporters, is how transport to the EU will be affected by a change in in systems for trade with non-EU countries agreed before the Brexit vote.  In order to cater for case border delays, whisky-makers are making contingency plans for alternative routes and storage, in case border delays affect sales or costs.   According to drink industry researchers IWSR France, Spain and Poland are among the top 10 global destinations for Scotch, together accounting for 19.3 million litre cases in 2016 or 21 percent of the total.

Oil

Oil exports from Libya (from Mellitah terminal) will be modified after protests disrupted production at the key El-Feel deposit for the first time in two months, putting the production of the OPEC members at risk of a decline.   Libya which is a member of OPEC was allowed to increase oil production whilst other nations in the group cut output to curb a global glut.  Oil finished a second week of gains on Friday after news that El-Feel was shut and American supplies drained.  Brent was changed by little at $67.33.  Meanwhile, according to the US Energy Department, US crude oil production shattered a 47 year output record in November and retreated slightly in December.  Oil output rose to 10,057 million barrels per day in November, while production in December fell 108,000 bpd to 9.949 million bpd according to EIA.  Output has increased in the last several years due to the shale boom, pushing the United States over Saudi Arabia among top producers. Russia is the only country that has the greater daily oil output.  Soaring oil production in the US has limited the increase in oil prices even though the OPEC and Russia have reduced output.  According to EIA, in December, production has pulled back after three consecutive increases.  The decline was driven by the offshore Gulf of Mexico output which dropped by 131,000 bpd in the month.  Furthermore, four Gulf of Mexico platforms were shuttered throughout the month after a fire.

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