“The League and 5-Star Movement …..”

The League and 5-Star Movement

The leaders of the League and the 5-Star Movement in Italy, which are the two parties that won the most parliamentary seats in the 4 March election agreed a governing accord.  This will break a political deadlock that has dragged on since the election.  The government programme of the two anti-establishment parties includes the issuance of short-term government bonds to pay companies who owe money by the state, according to economics chief of one of the parties.   The governing plan also includes radical measures to slash taxes and ramp up welfare spending.  At around 132 percent of gross domestic product Italy has the highest debt in the euro zone after Greece.  The two parties who have a history of eurosceptism put no reference in their programme to the dumping of the single currency or in holding a referendum over membership.

Silvio Berlusconi

In 2013, Berlusconi was convicted of tax fraud that resulted in his expulsion from the upper house of Parliament and a bar on holding any election position for six years.  An Italian tribunal has lifted a ban on centre-right leader Silvio Berlusconi from holding public office, meaning he could run to be prime minister in the next national election.  It might be a bit too late as last week Berlusconi gave his blessing to his political ally the League to form a government without him in view of the disappointing election result.  Berlusconi had campaigned actively ahead of the 4 March national election even though he was not a candidate.  Forza Italia did not perform as well as he had expected.  The centre-right was the largest force while the anti-establishment  5-Star Movement emerged as the biggest individual party.  Neither of them won enough seats to govern alone and trying to put together a coalition was complicated.  The 5 Star refused to work with Forza Italia.  After new elections became more likely Berlusconi last week gave his blessing to the League to seek a coalition deal without Forza Italia.

Germany’s Growth

Data on Tuesday showed that German growth fell by half in the first quarter of the year due to weaker trade and less state spending.  The German economy grew by 0.3 percent in the first three months, the slowest rate since the third quarter of 2016 according to preliminary data from the Federal Statistics Office.  It marks the 15^th consecutive quarter of expansion, the longest period of uninterrupted growth since German reunification.  The statistics office said the positive contributions in the first quarter came mainly from domestic demand while trade was weak.   The Office also confirmed the full-year GDP growth of 2.2 percent in 2017 which translated into a calendar adjusted rate of 2.5 percent.  This was the strongest pace since 2011.   The DIHK Chambers of Commerce and Industry blamed the slowdown in the first quarter on a flu epidemic, an unusually high number of strikes and an above-average number of holidays.  The government also said that it expects the economy to bounce back in the second quarter due to full order books and high employment.

Sterling 

Sterling appreciated against the dollar on Tuesday after data showed that UK employment jumped, although wage growth has yet to increase sharply.  The data showed that annual growth in earnings, excluding bonuses, edged up to 2.9 percent in the three months to March after a 2.8 percent rise in February.  The BOE has left the interest rates steady last week and cut its growth projections because of weak economic data.  The sterling fell to a four month low against the dollar.  This year the Sterling has outperformed other major currencies.  The weak data caused partly by bad weather, made BOE Governor Mark Carney  express caution on the state of the UK economy.

News from the UK

Trade Minister Liam Fox  invited overseas investors on Thursday to submit bids for financing 30 billion pounds of projects to help the world’s sixth largest economy to cope with the upheaval of leaving the European Union.  Britain is trying to reinvest itself as a global trading nation and improve economic ties with countries outside Europe as the government prepares to leave the EU next year.  Investors will be offered the chance to fund 68 projects across 20 sectors of the economy, including technology, housing and retail.  Many of the projects are outside London in less affluent parts of Britain.  The Department for International Trade will promote the projects to investors overseas and more will be added in the coming months.

European Yields

Italian bond yields jumped earlier in the week after a report that Italy’s 5-Star and League planned to ask the European Central Bank to forgive 250 billion euros of Italian debt.   The Italian/German 10 year bond yield gap tightened to 136 basis points from 139 basis points at the open.  Meanwhile on Thursday, Italian bond yields resumed their rise to approach the three month highs as the anti-establishment 5-Star and the far right League approached a deal to form a government which could implement high-spending policies.  The yield on the benchmark Italian 10 year government debt rose three basis points on the day at 2.13 percent which is its highest since late February.  Thursday’s rise in yields came after the 16 basis point spike that happened on Wednesday, the biggest one-day rise since March 2017.

Spain

The new Catalan Leader Quim Torra called for an end to direct rule over the Catalan regional government by Madrid at a joint news conference held in Berlin with former regional leader Carles Puigdemont.  The aim of the newly formed government is to seek dialogue with Madrid.  Torra said he would attempt to replace the region’s previous administration and would seek to put Puigdemont in power again without giving any details as he would go about it.      Prime Minister Mariano Rajoy had imposed a direct rule on the region after the previous administration, led by Puigdemont declared independence in October.  Under the legislation, Madrid will lift its intervention once the Catalan government is fully formed and members of the cabinet named.

US – Retail Sales

A solid rise in US retail sales in April rocked the US Treasuries market on Tuesday as the 10 year note’s yield was sent to a near seven year high after a wave of selling.   Bond holdings were unloaded after the US Commerce Department said retail sales rose 0.3 percent last month.  The 10 year yield hovered around the 3 percent since reaching last month on concerns about rising inflation and the federal budget gap.  Tensions between the US and other nations and signs of soft growth in Europe kept a lid on US yields.    The latest data supported the notion that consumer spending appeared on track to accelerate after slowing sharply in the first quarter.  The two year yield  which is the most sensitive to the traders’ view on Federal Reserve policy was up over 3 basis points at 2.581 percent after touching 2.589 percent which is the highest since August 2008.

China’s ZTE Corp

On Sunday US President Donald Trump pledged to help ZTE Corp, which is the second-largest telecom maker, get back into business fast after a US ban crippled the Chinese technology.     The company shut its main operations after the Commerce Department banned US companies from selling components to ZTE for seven years after it violated the terms of a settlement deal for illegally shipping goods made with US parts to Iran and North Korea.

China and the US

The US and China launched trade talks on Thursday  so as to avoid a damaging tariff war.  The White House trade and manufacturing adviser will not be a principal player on the US side, instead US Treasury Secretary, Commerce secretary and US Trade Representative will lead the American delegation in talks with the  Chinese Vice Premier who is the top economic adviser to President Xi Jinping.  Washington talks will start as USTR (United States Trade Representative) finishes up public hearings on the first batch of US tariffs on $ 50 billion worth of Chinese goods proposed as punishment for the alleged violations of US intellectual rights.  The tariffs which target Chinese electrical and machinery parts, autos and flat-screen television sets, could take effect in early June and may be followed by an additional round, targeting $100 billion worth of Chinese goods which are yet to be identified.  China is promising to retaliate on equal measures by targeting US soybeans, aircraft, autos and other goods for additional tariffs causing US farm commodity prices to fall.

Japan’s GDP

Japan’s economy which is the third largest economy, contracted more than expected at the start of the year, shrinking by 0.6 percent on an annualised basis.  The contraction was driven by declines in investment and consumption and weaker export growth arising from the uncertainty created over the protectionist policies adopted by US President Donald Trump on exports.  Exports minus imports added just 0.1 percentage point to first-quarter GDP as imports slowed more than exports.  Export growth is losing momentum, expanding just 0.6 percent in the first quarter after growth of 2.2 percent October-December last year.  Slower export growth reflected a decline in shipments of mobile phone parts and factory equipment in the quarter according to a government official.  This is a concern for Japanese manufacturers as many of these machines and electronic components are sent to China, where they are used to produce goods for export.    The data issued this week marked the end to eight straight quarters of economic expansion, which was the longest stretch of growth since a 12 quarter run between April-June 1986 and January to March 1989.

Turkey

Turkey’s lira slid to a record low and bond yields touched their highest in at least eight years on Tuesday after President Tayyip Erdogan said he plans to take greater control of the economy after elections next month. Turkey has called a snap presidential and parliamentary elections for June 24 and polls show Erdogan as the strongest candidate to win the presidential vote.  In a referendum last year Turks have narrowly backed a switch to an executive presidency.  Such a change is due to go into effect after the vote.  Erdogan who is a self-described “enemy of interest rates” wants to see lower interest rates to fuel credit growth, in particular to the construction industry.

Commodities

Gold prices erased the earlier gains on Thursday and edged closer to a five month low as the dollar pared losses against major rivals.  The Euro hovered near a five-month low on concerns that political developments in Italy could cause wider disruptions in the common currency bloc.  Furthermore, weighing on gold were the surging US bond yields, with the yield on the benchmark 10 year note hitting its highest level since 2011 amid signs the economy was strengthening.  A strong dollar makes greenback-denominated gold more expensive for holders of other currencies, while higher US bond yields weigh on the appeal of non-yielding bullion.  Gold prices can gain during times of uncertainty as the metal is seen as a safe place to park assets.  In other precious metals, silver was unchanged at $16.35  an ounce, having touched the lowest in two weeks at $16.17 in the previous session.

Currencies

The dollar appreciated on Thursday after the euro retreated to a five-month low on concerns that political developments in Italy could cause wider disruptions in the euro bloc.  Meanwhile, higher US treasury yields knocked emerging market currencies lower.  The Euro has nearly shed 1 percent this week amid political uncertainty arising from Italy.     The euro also faced pressure from a bullish dollar, which was boosted this week from the US yields breaking the 3 percent threshold to a seven year high.  The dollar index against a basket of six major currencies dipped 0.2 percent to 93.18 but was close to reach the 93.632 the highest since 19 December.  The Sterling rose 0.5 percent to $1.3558 after the Telegraph reported that Britian will tell Brussels it is prepared to stay in the European Union’s customs union beyond 2021.  Emerging Markets currencies did not fare well.  As Treasury yields enhanced the appeal of the dollar, and raised the global borrowing costs, it was a blow for some curriences that experienced slower economic growth at home.

Market Roundup

The earnings season is nearing to its close with more than three quarters of MSCI Europe companies having reported first-quarter results.    Bank stocks led the way on Tuesday.  An 81 percent increase in the first quarter net profit increased the Raiffeisen shares up, while Commerzbank led the DAX,  after reporting quarterly pre-tax profit ahead of analysists expectations.  Credit Agricole shares added to the optimism around the banking stocks.  The French bank’s shares had fallen at the open but recovered to trade up 1.3 percent after quarterly profit fell short of expectations.

Oil

Oil has steadied below the 3 ½ year highs on Monday as resistance emerged in Europe and Asia to the Sanctions by the US against the major crude exporter Iran.  Brent crude was up 20 cents at $77.32 a barrel and US light crude rose to $ 70.80.  It is unclear how the sanctions will hit Iran’s oil industry as it will depend on how major oil consumers will respond to Washington’s action against Tehran which will take effect in November.  China, France, Russia, Britain, Germany and Iran all remain in the nuclear accord.  The surge in oil prices has come at a time of tight supply amid record Asian demand and voluntary output restraint by the OPEC countries and non-OPEC producers such as Russia.  The market has been in check after the news of a rise in US drilling for new oil production.  The International Energy Agency cut forecasts for global oil demand this year, stating that the highest prices in three years will reduce consumption.  Weighing on prices are the European attempts to save the Iran nuclear deal, as officials promise to deliver practical solutions to dilemmas for companies posed by the US abandoning the Iran Nuclear deal.   Brent crude for July settlement hit $80.18 in London on Thursday for the first time since 2014, as US crude investories fell and traders continued to brace the impact of renewed Iran sanctions.

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