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Daily Briefing: Italian debt yields get stretched

LONDON (Reuters) - An uncomfortable day is in store for Italy and holders of its debt.

FILE PHOTO: Italian Prime Minister Giuseppe Conte at a news conference following the European Union leaders summit in Brussels, June 29, 2018

First, a bunch of economic data this morning is likely to underline that its economy is among the weakest in the euro zone, with second-quarter GDP expected to grow barely 0.2 percent on the quarter for just over one percent on the year.

Later in the day, Fitch is due to provide the latest evaluation of Italy’s creditworthiness with national debt standing at 130 percent of GDP.

The Italian-German bond yield spread is already at its highest since 2013 - a downgrade will widen it further and make Italy’s borrowing even more expensive.

All this comes against the drumbeat of tensions between Rome and Brussels: EU Economics Commissioner Pierre Moscovici is warning this morning of "unimaginable" difficulties if Italy's next budget pushes its deficit through the EU's ceiling of three percent of output.

A couple of new surveys give a mixed picture of the underlying mood in the UK economy, meanwhile. Consumers have shrugged off weeks of warnings about the possible chaos triggered by a no-deal Brexit, and market research firm GfK's headline gauge of consumer confidence rose in August - albeit still within negative territory.

That contrasted with a separate survey among companies by Lloyds Bank that showed business confidence this month fell to its lowest this year - 23 percent compared with levels of around 40 to 50 percent before the Brexit referendum.

Ominously, the Lloyds survey also showed a weakening in hiring intentions by companies and lower expectations for pay growth - something which if true would not take long to hit consumers.


The Argentine peso’s freefall and another slide in Turkey’s lira sent shockwaves across emerging markets again on Thursday. That has soured global market sentiment from Wall Street stocks to Italian debt, and Sino-U.S. trade tensions added to the worries first thing today.

The peso lost almost a fifth of its value at one point on Thursday, ending with a loss of close to 10 percent and a drop in August so far of almost 30 percent. Desperate attempts to shore up the currency with a central bank interest rate rise to 60 percent from 45 percent had little impact, with the government promising even more stringent fiscal tightening to stabilise the situation.

The evaporation of confidence in the currency even before disbursal of the $50 billion of IMF funds recently secured shows fears of a recession ahead, political ramifications going into next year’s elections and worries about the outside chance of capital controls.

Investors fear that at some point the currency protection afforded by such punitive interest rates is eroded if the net effect is financial and economic damage that renders the policy unsustainable.

The peso's drop unnerved all emerging markets. Brazil’s real fell to its lowest in almost three years. Turkey’s lira dropped again, passing 6.8 per dollar at one point on Thursday before stabilizing early Friday. The lira lost 3 percent at one point in the previous session on reports central bank deputy governor and rate setter Erkan Kilimci was leaving the bank.

India’s rupee fell to a record low earlier and Indonesia’s central bank intervened to support a falling rupiah, which dropped to its weakest since September 2015. MSCI’s emerging market equity index has its worst day in two weeks, dropping 1.2 percent on Thursday and adding to those losses today.

Reports that U.S. President Donald Trump is planning to detail tariffs on some $200 billion of Chinese goods as soon as next week added pressure on Friday. Trump told Bloomberg he was thinking of withdrawing the United States from the World Trade Organization if it doesn’t "shape up". After a string of recent record highs, the S&P500 ended down about 0.4 percent.

Although the dollar eased back a fraction on Friday and China’s yuan firmed slightly, Shanghai and Hong Kong stocks fell again, with the latter down almost 1 percent. Jakarta stocks were down more than 1 percent, too. Tokyo was more stable and Seoul outperformed, gaining 0.6 percent as its central bank held off raising interest rates at it latest policy meeting.

U.S. and European stock futures were more stable, but eyes in Europe were drawn to the rise in 10-year Italian government debt premia over Germany to their highest levels since 2013 before a credit rating decision by Fitch ratings agency later in the session.

Thursday’s auction of more than 7 billion euros of new debt went reasonably well, but markets have been on edge for weeks about the expansionary fiscal plans of the new populist coalition government in Rome and are concerned about its impact both on credit ratings and the country’s relations with the European Union.

Economy Minister Giovanni Tria pleaded on Thursday with the two main party leaders within the coalition to cool the rhetoric surrounding the budget for fear of undermining the nation’s debt markets further.

European Commissioner for Economic and Financial Affairs Pierre Moscovici told the financial newspaper Il Sole 24 Ore that the European Union expects a “substantial effort” from Italy on its upcoming budget law and said it was in Italy’s own interests to control its public debt.

-- A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own --