LONDON – Finance ministers from the euro zone countries discuss what to do about Italy today after rejecting Rome’s draft 2019 budget, the first time that a stand-off over a member state’s deficit has reached such a pass.
Italian Deputy Minister Luigi Di Maio is out with an FT interview arguing that Rome’s expansionary budget should become the “recipe” for fiscal policy elsewhere around the bloc; critics counter that the growth projections contained in the budget draft look way too optimistic.
Ministers will also turn their attention to reforms of the single currency zone that have lost impetus amid the troubled politics of the region – and which will not be helped by the open leadership questions in Berlin after Angela Merkel announced her plans for retirement.
Speculation continued over the weekend about just how near to – or far from – a Brexit deal Britain and the EU are, with sterling buoyed by hopes that it is only a few weeks away. The bigger question remains how Theresa May presents any compromise with Brussels to suspicious Brexiters in her ruling party.
In the meantime October’s services PMI data this morning will give a readout of the impact of all the uncertainty on the biggest sector of the UK economy; analysts expect a small decline.
The shock European political news of the weekend was a poll showing France’s far-right Rassemblement National (RN) party – the old Front national – had jumped ahead of President Emmanuel Macron’s LREM for the first time in a poll of voting intentions for May 2019 European Parliament elections, with a 21 to 19 percent lead.
As stark as that is, the result also speaks volumes about the sorry state of France’s two mainstream parties, with conservative Les Republicains on 13 percent and the Socialists on a mere 7.5 percent.
Asia’s stock markets have turned sharply lower again on Monday, wiping out a chunk of the rally of late last week as U.S. political and monetary policy concerns unnerved investors already parsing a plethora of competing influences.
Just a day ahead of mid-term congressional elections, another above-forecast U.S. jobs rise of 250,000 last month and fastest average hourly earnings rise since 2009 have stoked expectations of further U.S. interest rate rises next month and well into next year.
Coming on top of the highest consumer confidence reading in 18 years, the payrolls number sent 10-year U.S. Treasury yield back above 3.2 percent for the first time in almost a month and saw the dollar recapture ground lost against China’s yuan and many emerging currencies on Friday amid hopes of détente in the Sino-U.S. trade warat the meeting of U.S. President Trump and China’s President Xi at the G20 summit later this month.
Added to that mix of events was speculation about the outcome of Tuesday’s U.S. midterms, with consensus focused on Democrats recapturing a majority in the House of Representatives and Republicans holding the Senate.
Investors are braced for greater policy uncertainty and volatility if that’s the outcome, with rising risks of gridlock, standoffs, government shutdowns and threats of Trump’s impeachment, without shifting the protectionist dial largely controlled by the White House.
While Treasury yields and the dollar slipped back a touch first thing Monday, Asia’s main bourses followed Wall St stocks lower. HK stocks lost more than 2 percent, while Shanghai was down 0.4 percent. Tokyo lost 1.5 percent and Seoul’s Kospi was down almost 1 percent. U.S. and European stock futures pointed lower as well.
Despite a largely upbeat headline earnings season so far, investors remain on edge about future guidance as economic soundings and business surveys cool. Apple’s warning about year-end holiday season sales dampened the mood for many on Friday despite flickers of optimism on trade.
Service sector business readings for October are out around the world on Monday, with China service sector reading at a 13-month low and the composite all-industry index at its lowest in more than 2 years. China’s offshore yuan slipped back about 0.4 percent after the trade-related two-day surge of 1.7 percent on Thursday and Friday last week.
Emerging market economic woes were further underlined by signs South Africa’s private sector business activity shrank at its fastest pace in four years last month, while Turkey’s inflation rate accelerated above forecasts to a 15-year high of 25 percent.
South Africa’s rand and Turkey’s lira weakened first thing, with the inflation number offsetting some optimism in the latter about progress between Ankara and Washingtonover potential U.S. fines faced by Turkey’s Halkbank over Iran sanctions. Overall, MSCI’s emerging market equity and currency indices were lower on Monday.
Sterling was firmer against the dollar and euro after weekend press reports over some movement on Brexit talks surrounding a UK-wide customs union agreement. Euro group finance ministers prepare to meet later in the day, meantime, with discussion of Italy’s budget high on their agenda.
In an interview with the Financial Times, Italy’s deputy PM di Maio said the country’s budget deficit expansion could be a model for the rest of the EU to match U.S. fiscal stimuli and encourage investment and growth.