“Italy’s Political Situation …”

Italy’s Political Situation

The head of the ruling 5-Star Movement, Luigi Di Maio, signalled the imminent demise of Italy’s coalition government on Tuesday.  He thanked Prime Minister Giuseppe Conte for his time in office.  On Tuesday Italy’s prime minister resigned after launching an attack on his own interior minister, Matteo Salvini, accusing him of sinking the ruling coalition and endangering the economy for personal and political gain.  Prime Minister Giuseppe Conte whilst addressing parliament after it was recalled from its summer recess to decide the future of the 14- month-old government, accused the far-right League party chief Salvini of seeking to cash in on his rising popularity. On 8th August Salvini declared that his alliance with the anti-establishment 5-Star Movement was dead and called for early elections, 3 ½ years ahead of schedule.  He is confident his surging popularity in opinion polls will sweep him into power and push the anti-establishment 5-Star into opposition.     After the Senate debate, Giuseppe Conte, who belongs to neither of the coalition parties, handed his resignation to President Sergio Mattarella, who said he would begin talks with parliamentary groups on Wednesday to see if a new coalition can be formed.  Sentiment was soothed when Matteo Salvini Italy’s League, said he was ready to keep the coalition government alive to approve a 2020 budget.  Meanwhile, Italian President Sergio Mattarella began two days of talks with parties on Wednesday to find a way out of a political crisis that will lead to the formation of the country’s 67th government since World War Two or too early elections.  On Thursday President Sergio Mattarella gave Italy’s parties five days to close a deal to resolve a political crisis and avoid an election.


Britain is set to leave the EU on 31st October and has less than 74 days to resolve a crisis that started three years ago.  On Monday Prime Minister Boris Johnson, who took office last month after Theresa May, who failed three times to get the withdrawal deal she negotiated approved, called on France and Germany to change their position on Brexit and negotiate a new exit deal for Britain.  Johnson reiterated his stance that he is ready to leave the European Union without a deal if they do not.  The European Commission who is leading negotiations on behalf of France, Germany and other EU members, said it was ready for a no-deal Brexit and that Britain would suffer most under such a scenario.  On Wednesday German Chancellor Angela Merkel challenged Britain to come with alternatives to the Irish border backstop within 30 days however, French President Emmanuel Macron cautioned there would be no renegotiation of the Brexit deal.  Johnson repeatedly said that the Irish border backstop, which is a protocol of the Withdrawal Agreement struck by his predecessor Theresa May needed to be removed in full.   From his end Macron said the demands made by Johnson for a renegotiation of the divorce deal, including the removal of the Irish backstop, were not workable as they currently stood.  Johnson met with Macron in Paris on Thursday.  With just over 10 weeks left until the scheduled departure, the EU has repeatedly said it will not renegotiate the Withdrawal Agreement and that it will stand behind Ireland.

Germany’s Balanced Budget

Germany has had a balanced budget since 2014, a fiscal rule introduced by former conservative finance minister Wolfgang Schaeuble and stuck to by his Social Democrat successor Olaf Scholz.  Speaking at a government “open day” news conference, Scholz acknowledged the debate about debt-financed spending but said a state should live within its means in economic good times, not least because this means it would be better placed to act when things go wrong.  Finance minister Olaf Scholz declined to comment on a media report on Friday that said Berlin would be prepared to ditch its balanced budget rule and take on new debt to counter a possible recession.   This has pushed bond yields higher.  Germany’s debt level is expected to fall to roughly 58 percent of economic output that is below 60 percent and giving it more flexibility on future spending.  Scholz said that the global financial crisis in 2008/2009 had cost Germany roughly 50 billion euros, adding: “we have to be able to muster that (sum of money), and we can muster that.  That’s the good news.”

Business In Germany

Germany’s private sector continued to struggle in August as a manufacturing recession dragged on and activity in the services sector eased slightly according to a survey on Thursday, suggesting that Europe’s largest economy is heading for a recession.  The Purchasing Managers’ Index (PMI) by Markit, which tracks the manufacturing and services sectors that together account for more than two-thirds of the economy, edged up to 51.4 from 50.9 the previous month.  However, Phil Smith from IHS Markit said the data was not strong enough to dispel the threat of another minor contraction in gross domestic product in the third quarter.  The German economy contracted 0.1 percent in the April-June period due to a drop in exports, and sentiment indicators are suggesting hardly any improvement for the three months from July to September.  The survey further showed that overall job creation in the private sector slipped to a five-year low while business expectations about future output turned negative for the first time since late 2014.

Eurozone Business Growth

IHS Markit’s Eurozone Composite Flash Purchasing Managers’ Index (PMI) which is seen as a good guide to economic health, climbed in August to 51.8 from 51.5 in July.  Any figure above the 50 indicates growth.  The survey showed that eurozone business growth has nudged up in August.    The composite future output index measuring overall business optimism sank to 55.5 its lowest since May 2013, from 58.8 in July.  IHS Markit said that the PMI suggested economic growth could range between 0.1 percent and 0.2 percent this quarter.

FED Minutes Issued On Wednesday

Minutes from the two-day meeting released on Wednesday, showed that the ultimate decision of policymakers to lower the central bank’s benchmark interest rate by a quarter percentage point, drew more opposition than the rate setting vote of 8-2 vote, announced after the meeting of the 31st July.  While a “couple” of participants were in favour of a deeper cut of half a percentage point to help lift inflation towards the Fed’s target and the fallout from the global trade tensions, a larger number – characterised in the minutes as “several” favoured no change at all.  Meanwhile, the minutes showed broad concern among policymakers over a global economic slowdown, trade tensions and sluggish inflation.  Since the meeting the FED has come under increasing pressure to cut borrowing costs more, including a call by Trump on Wednesday for the FED to slash its benchmark rate.  The Fed policymakers agreed at their 30-31 July meeting that they did not want to give the impression they were planning more rate cuts.  According to the minutes, “Participants generally favoured an approach in which policy would be guided by incoming information …. And that avoided any appearance of following a pre-set course.”

Symposium Of Global Central Bankers – Friday

Officials from major central banks will gather at Jackson Hole Wyoming on Friday, with markets focused on a scheduled speech by Federal Reserve Chair Jerome Powell.  His comments are of interest after last week’s inversion of the US yield curve, which is considered as a recession signal.  It boosted expectations that the FED would lower interest rates at its September policy meeting.  Faced with rising risks to the US economy, the central bank in July cut rates for the first time since the financial crisis.  The Jackson Hole Speech is also important for oil as signals from the FED on monetary easing affect the US Dollar.  A weaker US currency tends to support oil prices.

The People Bank Of China (PBOC) Announced Reforms

The PBOC announced interest rate reforms over the weekend addressed to lower corporate borrowing costs.  On 17th August the PBOC said that it would improve the mechanism used to establish the loan prime rate starting this month, a key part of broader market reforms.  According to the PBOC statement published on its website, the move will “deepen market-based interest rate reform, improve the efficiency of interest rate transmission, and lower financing costs of the real economy.”  The central bank’s latest move to reform the way mainland interest rates are set pushes aside a long-standing benchmark decided by officials.  The step is designed to ease credit conditions and help companies borrow.    Steps are being taken to enhance the “loan prime rate” which will now replace the old benchmark.  It will be established mainly by reference to the one-year medium term lending facility rate, which is more market-oriented but still controlled by the PBOC.  This would allow policymakers to effectively bring down costs for companies and individuals.

China’s Local Bond Issuance

China’s local governments issued a net 1.69 trillion yuan in special bonds in the first seven months of the year, said the finance minister on Thursday, which accounts for 78.4 percent of the annual quota.  Beijing is trying to encourage more regional infrastructure investment to support the economy amid the trade war between the US and China, that is hurting business confidence and the manufacturing sector.  Infrastructure investment rose 3.8 percent in the first seven months from a year earlier, slowing from 4.1 percent in the first half, despite massive local bond issuance.   Construction activity has been more modest than expected, raising expectations that policymakers have to boost up the measures to achieve additional growth.  The Central bank has announced a quota of 2.15 trillion yuan for local governments to sell special bonds this year to fund road, rail and water projects.  In a statement the minister said, that in July alone, net issuance of such bonds totalled 299.7 billion yuan.

Indonesia’s Central Bank And The Move In Interest Rates

Indonesia’s central bank has surprisingly cut the benchmark interest rate for the second time in two months on Thursday, in order to support economic growth.  Bank of Indonesia cut the 7-day reverse repurchase rate by 25 basis points to 5.5 percent.  Governor Perry Warjiyo said that the decision was consistent with Indonesia’s low inflation outlook.  Two other policy rates for overnight deposit and lending facilities were trimmed by 25 bps to 4.75 percent and 6.25 percent respectively.

South Korea Short-Term External Debt To Reserves Ratio

Central bank data showed on Wednesday that South Korea’s ratio of short-term external debt to foreign exchange reserves rose to a near five-year high in June amid a rush of foreign buying in local public bonds.  The Bank of Korea data further showed that, short-term external debt rose to $140 billion by the end of June from $129.4 billion three months earlier, while foreign reserves fell to $403.1 billion from $405.3 billion over the same period.  This pushed the ratio of short-term external debt to reserves to 34.7 percent up from 31.9 percent at the end of March and the highest since hitting 34.9 percent at the end of September 2014.  The increase in the short-term external debt burden indicates the country’s cross-border financial stability is weakening.  The ratio is however below the 80 percent recorded in late 2008.  Meanwhile, total external debt owed by Asia’s fourth-largest economy also rose to $462.1 billion as of the end of June from $440.6 billion three months before.

Reserve Bank Of Australia’s August Meeting Minutes

Minutes of the Reserve Bank of Australia’s (RBA) August meeting suggested that the central bank was not in a hurry to cut rates again.  While RBA is seen as leaving the possibility for further easing open, analysts reckon the prospect of an immediate rate cut was limited.


Oil increased above the $60 a barrel on Thursday, supported by a drop in US crude inventories and OPEC-led supply cuts.  Worries about the global economy still weighed.  US crude inventories fell by 2.7 million barrels last week.  The US energy Information Administration also said gasoline and distillate inventories rose.  The price of Brent is up by about 13 percent this year, supported by supply cuts led by the OPEC (Organisation of the Petroleum Exporting Countries) and export cuts affecting Iran and Venezuela which are under US sanctions.  The slowdown in economic growth arising from the US – China trade dispute and Brexit has been putting pressure on prices.  The International Energy Agency have been lowering forecasts for world oil demand.

Currency Roundup

Monday saw the British pound falling back from a near three-week high against the euro, however sentiment towards the pound was better than in recent sessions as investors hoped that Britain and the EU would make some progress in their Brexit talks.  The euro advanced on Monday after registering its biggest weekly drop in nearly two months as risk appetite has gradually returned to global markets after a week of turmoil.    The dollar hovered near a three-week high on Tuesday, amid expectations that policymakers around the globe would unleash fresh stimulus which improves the appetite for riskier assets and lift US government bond yields.  The yields on US Treasuries pulled away from three-year lows, helped by the prospect of Germany ditching its balanced budget rule to boost spending and on more economic support measures by China.  The euro was a bit higher at $1.1086, but still held close to a two-week trough of $1.1066 set on Friday amid concerns over political developments in Italy.  Meanwhile, the single currency remained at the same level on Tuesday after Italy’s Prime Minister Giuseppe Conte announced his resignation.   On Wednesday the euro was stuck near the $1.11 with forex markets mostly calm ahead of a crucial meeting of central bankers later in the week.  The dollar has been supported by what President Donald Trump said that his administration was considering potential tax cuts on wages as well as profits from asset sales.  The big focus was on the pound as Prime Minister Boris Johnson went to Berlin to meet Chancellor Angela Merkel for talks over Brexit.  The pound jumped on Tuesday after Merkel raised the possibility of practical solutions to the so-called backstop, an insurance policy for the Irish border after Brexit, which is opposed by London.   On Thursday the pound crept higher, however doubts over the ability of British Prime Minster to convince France to reopen Brexit negotiations were likely to limit any gains.  Investors have been dumping the pound fearing significant damage to the UK economy.  The Euro fell heading towards its three-week low as an uptick in eurozone business growth was offset by another decline in China’s currency.  Investors sold Asian currencies after the Chinese yuan fell to an 11-year low against the dollar, indicating trade tensions between the US and China remain a major issue.  Meanwhile, the yen advanced by 0.3 percent to 106.29 yen nearing last week’s eight-month low of 105.05 yen.

Markets Wrap

On Monday long-dated bonds in the Eurozone shot higher amid a calmer tone in world markets and increased expectations for fiscal stimulus in Germany.  Thirty-year bond yields across Europe were up 9-10 basis points on the day.  For example, Germany’s 10-year yield was up 4 bps at -0.63 percent off record lows around -0.73 percent last week.   Wall Street opened higher on Monday, after China’s plans of an interest rate reform reinforced the hopes that major economies will take action to counter the impact of escalating global trade tensions.  European shares rose for a third straight session on Tuesday, building on the recovery since late last week as AstraZeneca the British drug maker surged 1.5 percent, after the company said its diabetes drug Farxiga met the main goal of the study of the treatment of patients with heart failure.  Meanwhile the Danish jewellery maker, Pandora maintained its full-year guidance.  A fall in bank shares and auto parts makers capped gains.  Car industry shares climbed, pushing the European stock markets to a rebound on Wednesday, amid an Italian newspaper report Il Sole 24 Ore suggested the previously aborted deal could be back on the table, while no details of the sources were given.  The Italian FTSE MIB moved 1.4 percent higher bouncing back from a dip in the previous session amid the deepening Italian political crisis. On Wednesday after the release of the FED minutes, US stocks held on to session gains with the benchmark S&P 500 Index up about 0.77 percent on the day.  The yields on longer-dated US Treasury securities rose after the FED minutes were published.  The 10-year note yield climbed to 1.58 percent while the 30-year bond rose further above the key 2 percent level.  Comments by Trump on Wednesday who has repeatedly criticized the FED policies, come as he seeks to downplay the worries of a trade war between the US and China that could weigh on the US economy and trigger a possible recession before the November 2020 presidential election.  Thursday saw the shares market slipping, as uncertainty over the outlook for US interest rate cuts left investors edgy on the release of the FED’s policy meeting minutes.  The MSCI world equity index which tracks shares in 47 countries, edged down 0.1 percent, whilst the Euro STOXX 600 fell 0.2 percent, following an 0.6 percent drop in MSCI’s broadest index of Asia-Pacific shares outside Japan.  Wall Street futures gauges were down between 0.2 percent and 0.3 percent.  Thursday also saw most eurozone government bond yields rise after data showed service activity picked up last month and manufacturing contracted less than expected.  Italian government bond yields fell on the expectations that a new government will be formed soon.

Malta:  Retail Price Index – July 2019

In July 2019, the annual rate of inflation as measured by the Retail Price Index (RPI) was 1.68 percent down from 1.9 percent in June 2019.  The largest upward impact on the annual inflation was recorded in the Food Index, while the largest downward impact was recorded in the Clothing and Footwear Index.  The Retail price index measures monthly price changes in the cost of purchasing a representative basket of consumer goods and services and is closely linked to the cost-of-living adjustment (COLA) increases and period rent payment adjustments.  The highest annual inflation rates in July 2019 were registered in Food (3.77 percent) and Housing (2.11 percent) whereas the lowest annual inflation rates were registered in Clothing and Footwear (-1.24 percent) and household Equipment and House Maintenance Costs (-0.10 percent).

Outbound Tourism:  2nd Quarter 2019

During the second quarter of 2019, outbound tourist trips towards the EU and non-EU countries registered increases when compared to the same quarter in 2018.  Italy and the United Kingdom remained the most popular destinations.  Meanwhile, total outbound tourist trips between January and June 2019, amounted to 305,001 an increase of 7.4 percent over 2018.


Antonella Mercieca

Client Relationship Manager


Bloomberg, Reuters, https://nso.gov.mt


August 23rd, 2019

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