“Italy’s Fiscal Plans …”

Italy’s Fiscal Plans

The markets settled in a downbeat mood earlier in the week, over the populist government’s fiscal plans.  Italy’s 10-year borrowing costs hit their highest since March 2014 after a senior official from the League, one of the parties in the ruling coalition, said most of the country’s problems would be solved if it returned to its own currency.  The reference by Claudio Borghi on the possibility of Italy leaving the single currency bloc jittered markets which were already shaken by the government’s budget proposal last week.  With the news the Euro fell to its weakest in three weeks.  The yield on the country’s 10 year government bond rose 11 basis points to a 4 1/2 year high of 3.41 percent.  The Italy/Germany bond yield spread widened to 296 basis points.  The Stoxx Europe 600 Index fell for only the second time in six days as equities in Italy declined.  Shares in Italian banks, which have large sovereign bond holdings, sold off sharply to hit a 19-month low, down 2.8 percent.  Italy’s FTSE MIB tumbled 1.4 percent.   Eurozone banks also dropped 1.3 percent as the comments reignited investor’s anxieties about contagion to Eurozone finances from Italy’s higher budget deficit plans. Italy’s two year government bond yield was up 6 bps to a one-month high of 1.45 percent and five year bond yields rose more than 10 bps to a four-month high of 2.687 percent.   Irrespective of the reaction from both the market and the EU on the Italian government spending plans, Deputy Prime Minister Luigi Di Maio said on Tuesday that Italy will not change its budget deficit targets. The budget programme for 2019-2021 had to be finalised later on Tuesday and the estimates for 2020 and 2021 were lower than those initially reported, bringing further relief to bond markets which were impacted by the government’s plans to ramp up spending.

Annual Conference Of Governing Conservative Party

British Prime Minister Theresa May’s Conservative Party gathered on Saturday for its annual conference with some divisions over her Brexit plans and raising doubts about her own future.  Although Britain is scheduled to leave the EU on 29 March 2019, the terms of departure remain unclear.  According to Theresa May the talks on a divorce deal are at an “impasse”.  May says that her “Chequers” proposals are the only viable option, but EU leaders have said parts of them are unacceptable and many conservative lawmakers have threatened to vote down a deal based on May’s blueprint.   Businesses are concerned that there will be no deal, causing a lot of uncertainty, potentially leading to tariffs and border delays.  In a summit of EU leaders held last week, there was a blunt dismissal of May’s proposals, which they said would fail to resolve arguments over the land border of Northern Ireland, in the UK with the Irish Republic.  May and the government ministers are confident that a final Brexit deal can be agreed, and also insisted that no-deal would be better than a bad deal.  May has shown no sign of moving away from her blueprint and at her conference she tried to put on a show of unity.

Johnson Challenges May on Brexit

Former British foreign minister Boris Johnson who is Theresa May’s most powerful critic in her governing party, said her so-called Chequers plan to leave the European Union was a “cheat” that would leave Britain “locked in the tractor beam of Brussels”.  However, May did not show any interest or diverting from her plan to keep close ties with the EU after Brexit, the biggest shift in British foreign and trade policy for more than 40 years.  It is just six months away from Britain’s deadline to leave the EU with May’s position who is at the helm of the party has been criticised of her Chequers plan.  Boris Johnson is the figurehead for the campaign to leave the EU and he is the bookmakers favourite to replace May.  He warned conservatives that if they support Chequers they could be signing up to the party’s electoral death.  In an interview, Theresa May said she was a bit cross with Johnson but only because his Brexit proposals would tear up the United Kingdom by forcing Northern Ireland to operate separately from the rest of the UK.  Although some of Johnson’s supporters welcomed his speech they now believed that this was not the time to launch a leadership bid against May.

Can The UK Unilaterally Reverse Brexit?

The Court of Session in Scotland has asked the European Court of Justice (ECJ) for a preliminary ruling on whether the British parliament can change its direction about leaving the European Union without the bloc’s agreement, the Scottish court said on Thursday.  The Court of Session has asked the ECJ which rules on the meaning of the EU law, for a preliminary ruling, said the court in a statement.   The petitioners, representing Scottish voters, argued to the Scottish court, that if parliament is to vote on the government’s eventual Brexit deal, it needs legal certainty as to whether the process can be reversed without permission from the other 27 EU member states.  The Article 50 withdrawal clause in the EU’s Lisbon Treaty can be reversed with the permission of the other 27 EU states, however, it does not specify whether the exit process can be unilaterally reversed.  The former British diplomat Lord Kerr, who drafted it has said Britain can change its mind at any stage before the final exit date in 2019.  Last year, Scottish law-makers who opposed to Brexit, filed a petition to the Court of Session.   They represent electoral areas in Scotland which noted strongly to remain in the EU in the June 2016 referendum.  The UK as a whole voted to leave.  Meanwhile, the Scottish National Party, the strongest political party north of the border, has opposed to leaving the bloc.

Britain’s Implementation Of Digital Service Tax

Chancellor of the Exchequer Philip Hammond said on Monday that Britain will unilaterally implement a digital service tax if there is no international agreement soon on how to tax big internet companies.  He blamed US tax reforms for slow multilateral progress.   So if in an agreement is not reached the UK will go alone with Digital Services Tax of its own, according to him.  Britain was considering taxing the revenues of internet firms such as Facebook and Google until international tax rules are changed to cope with digital firms that can shift sales and profits between jurisdictions.  He further said that the tax would only apply to firms above a “quite substantial” size threshold.  This would involve putting a value on the content and data of British consumers, as a share of the firms’ overall value, and calculating what proportion of the business is based in the UK.  He added that talks on an international level had been stalled by US tax reforms aimed at ensuring internet firms pay their taxes there.  Hammond also said Britain is looking into ways to update its competition policy in response to the power major companies.

Revamp of the NAFTA Trade 

A deal between the US and Canada to revamp the NAFTA Trade deal with Mexico gave a boost to global risk appetite at the beginning of the week.  The new agreement which is called USMCA United States-Mexico-Canada Agreement is aimed at bringing more jobs into the United States and put pressure on Canada to agree to new terms on auto trade and dispute settlement rules to remain part of the three-nation pact.  Canada and Mexico accepted more restrictive commerce with the United States which is their main export customer.   The agreement was reached after weeks of tense bilateral talks to update the 1994 North American Free Trade Agreement.  The US had forged a separate trade deal with Mexico, the third member of NAFTA in August.  According to Trump, “these measures will support many-hundreds of thousands-American jobs” and described the trade deal as “the most important” the United States had ever made.   A collapse of NAFTA could have caused US farmers to lose access to major agricultural markets in Canada and Mexico at the same time that China has stopped purchases of US soybeans and other commodities due to tariff war.    Although the impact on jobs is not imminent, the deal provides Trump with a win running up to the 6^th November congressional elections.  From his end, Canadian Prime Minister Justin Trudeau said the deal removed uncertainty but he conceded that Canada had made some difficult compromises.  Canada’s dairy industry criticized him for giving more market access to US imports.

US – Jobs Data And Heaviest US Treasury Sell-Off

Data released on Wednesday supported the view that the US economy is in a strong shape.  According to the ADP National Employment Report on Wednesday, private employers added 230,000 jobs in September, the most since February, and which is more than the 185,000 jobs was expected by economists.    As the US growth remains strong and other economic data of larger economies including the Eurozone has come in below expectations, the dollar is outperforming.  On Wednesday Fed Chairman Jerome Powell said that the central bank may raise interest rates above an estimated “neutral” setting as the “remarkably positive” economy continues to grow. He feels the economy is on the verge of “a historically rare” era of ultra-low unemployment and tame prices.   This came after a survey showed that the US services sector activity increased to a 21-year high last month, boosting expectations that Friday’s payroll report could surprise.  The positive economic view and a steady policy tightening path, have largely driven up Treasury yields, which rose to over 7-year highs on Thursday, adding further pressure on Asian currencies.  Rising yields effect the demand for emerging assets as they tend to draw away foreign funds.

US Job Growth

US job growth slowed sharply in September as hurricane Florence weakened restaurant and retail payrolls.  The unemployment rate fell close to the 49 year low of 3.7 percent pointing to further tightening in labour market conditions.  The monthly report released by the Labour Department on Friday also showed a steady rise in wages, suggesting moderate inflation pressures, which could ease concerns about the economy overheating and keeping the Federal Reserve on a path of gradual interest rate increases.  Last month nonfarm payrolls increased by 134,000 jobs, the lowest as the retail and leisure and hospitality sectors reduced employment.  Manufacturing payrolls increased by 18,000 in September while construction companies hired 23,000 more workers last month after increasing payrolls by 26,000 jobs in August.   Furthermore, employment in the leisure and hospitality sector fell by 17,000 jobs, which is the first drop since September 2017.  Retail payrolls dropped by 20,000 jobs last month.

Turkish Bonds Drop After Inflation Jumps 25 percent

On Wednesday, Turkey’s dollar-denominated bonds fell, after data showed a 25 percent year-on-year jump in inflation raising the pressure on the Turkish central bank to raise interest rates again.  The Ankara’s bonds maturing in 2030 saw the biggest move falling more than 1 cent in the dollar while shorter-term debt dropped 0.2 and 0.6 cents.  Meanwhile the lira was down just over 1.2 percent against the dollar.

Currencies

The pound fell as Brexit and the annual conference of the governing Conservative Party continued to dominate headlines.  The Euro is being hurt by the uncertainty around Italy’s debt, fiscal plans and future ties with Europe, which has unnerved markets and tensions among other leaders within the EU.  The Euro has been testing a technical support at $1.51-$1.508 which is a temporary low, set in June.  Meanwhile, according to a Reuter’s poll, investors continued to bet that Asian currencies would weaken against the dollar, in view of the hawkish comments by Federal Reserve policy makers and a steady rate hike path.  Since the Fed last Wednesday raised rates as was expected and which provided an upbeat view of the US economy, the dollar index against a basket of six major currencies has gained nearly 1 percent.

Market Round Up

On Wednesday US stocks rose and the Dow Jones Industrial Average went up to an all-time high, driven by gains in financial and technology stocks.  Ten out of the 11 major S&P sectors increased, with financials and technology increasing by 0.6 percent and 0.5 percent respectively.  US bank stocks with Citigroup, JP Morgan Chase, Bank of America were up between 0.6 percent and 0.7 percent.  Furthermore, among the top gainers on the S&P 500, General Motors rose 2.9 percent after Honda motor said it would invest $2 billion over 12 years in the US carmaker’s Cruise self-driving unit.  Data about the healthy US economy also filtered through the markets as US private payrolls recorded their biggest increase in seven months in September, indicating a strengthening labour market.   Meanwhile, US Treasury bonds sent yields to multi-year highs pushing the benchmark 10 year yield to its highest level since May 2011.   On Thursday, Wall Street stocks fell broadly with the Dow suffering its first decline in six sessions whilst both the S&P 500 and NASDAQ seeing their worst day since 25^th June.  The CBOE Global Markets volatility index which is known as Wall Street’s “fear gauge”, jumped as high as 15.84 which is its highest since 15^th August. Likewise the Japanese equivalent which is Nikkei volatility index surged as high as 19.07 its highest in seven weeks.   On Friday, Asian shares wobbled after the benchmark US Treasury yields surged to a fresh seven year high of 3.232 percent as strong economic data raised concerns over faster raising interest rates than expected.

Oil

Oil prices since mid-august rose 15-20 percent and pushed to their highest since 2014.  Oil consolidated around its highest in almost four years as a slowdown in US drilling add to concerns over supply losses from Iran and Venezuela.  Oil futures jumped as US Sanctions on Iran came into force and the new NAFTA deal fosters growth.  Brent futures were up 2.8 percent at $85.05 a barrel while US light crude futures were up 3.14 percent at $75.55 a barrel.  On Friday, oil prices moved back towards four year highs as traders anticipated a tighter market due to US sanctions on Iran’s crude exports.  Benchmark Brent crude oil was up 10 cents a barrel at $84.68.  On Thursday Brent fell by $1.34 a barrel or 1.6 percent.  US light crude was up 30 cents at $74.63, a gain of more than 2 percent since last Friday.  Both benchmarks retreated on Thursday following a rise in US oil inventories and after Saudi Arabia and Russia said they would raise output to at least partly  make up for the expected disruptions from Iran.  Washington wants governments and companies around the world to stop buying Iranian oil from 4^th November, in order to put pressure on Tehran to renegotiate a nuclear deal.

Commodities

The price of gold fell as investors favoured riskier assets after the NAFTA agreement was reached.  Spot gold was down 0.2 percent at $1,189.31 per ounce.  Gold has seen six consecutive months of losses, its longest monthly losing streak since January 1997, amid to the strengthening of the dollar from a buoyant US economy and fears of a global trade war.  Gold hit its highest in more than a week to reach the $1,200 per ounce mark as investors favoured the metal after the stock markets sold off due to anti-euro comments by the Italian lawmaker.  Meanwhile silver followed gold rising 1.47 percent to $14.673 per ounce after earlier hitting its highest since 28 August.

General Electric Replaces CEO With Outsider

In a surprise move General Electric replaced its Chief Executive officer John Flannery with outsider and board member Larry Culp.  The company said it will take roughly a $23 billion charge to write off goodwill in its power division, primarily from a large 2015 acquisition.  The company also said that it would fall short of its forecast for free cash flow and earnings per share for 2018, due to weakness in its power business.  The share price rose 7 percent to close at $12.09 as investors bet that Culp could re-energize the GE brand and transform its portfolio quickly.   Since Flannery became CEO, the shares have more than halved.  GE’s falling profits last year forced GE to slash its overall profit outlook and cut its dividend for only the second time since the Great Depression.

Tesco

Tesco Britain’s biggest retailer, undershot the first-half profit forecasts, after weak trading in central Europe and Asia, offsetting the accelerating sales in the core UK business.  The company which this year acquired wholesaler Booker, reported operating profit before one-off items of 933 million pounds up 24 percent but short of the 978 million pounds expected by analysts.  Shares in Tesco which were up 12 percent so far this year, fell 5.4 percent in early trading to 222 pence.  According to the chief executive Dave Lewis, the group had grown sales in its home market, boosted by Booker and strong summer trading.  He also said the group was “firmly on track to hit its medium-term ambitions.”  Lewis has been rebuilding Tesco since 2014 when an accounting scandal started a dramatic downturn in trading.

Malta – Direct Investment In Malta And Abroad – 2017

As at the end of 2017, foreign direct investment in Malta was registered at EUR 169.8 billion an increase of EUR 8.3 billion over the corresponding period last year.  Financial and insurance activities contributed EUR 166.4 billion or 98 percent to the total stock of FDI in Malta during the period under review.   During 2017, there was a net increase in FDI flows in Malta of EUR 2.8 billion equivalent to a decrease of EUR 0.6 billion over the corresponding flows in 2016.

Malta:  International Day Of Older Persons 2018

By the end of 2017, 18.8 percent of the total population residing in Malta was at least 65 years of whom 54.6 per cent were females.  According to data from the NSO the number of persons aged 65 or more has been on a steady increase between 2007 and 2017 with an increase of 57.8 percent over 2007 reaching a total of 89,517.  The southern Harbour district had the highest concentration of older persons (22.5 percent), followed by the Gozo and Comino district (21.9 per cent).

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